New rules for money market funds were approved by the Securities and Exchange Commission (SEC) yesterday after a few years of contentious debate. Some money market funds will have floating net asset values (NAVs) instead of having their NAVs strictly pegged to $1 per share. Redemption restrictions will also be allowed on certain money funds during times of stress. Finally, the SEC will also issue a re-proposal on how it will gauge a fund’s credit-worthiness, using methods other than credit ratings.
The majority of money market funds available to individual investors will not be affected by the new floating NAV rules. This appears to be a compromise the SEC accepted as part of its fight with the fund industry to get the reforms pushed through. The floating NAV rules will apply to institutional prime money market funds and (according to Mike Krasner at iMoneyNet) tax-free institutional funds. This said, “retail” money market funds will continue to be able to peg their NAVs to the $1 per share mark.
Non-government money market funds will “have the ability to impose to fees and (redemption) gates during times of stress.” In other words, the SEC will allow non-government money market funds to restrict the size of withdrawals and/or place redemption fees during periods of stress. This rule is intended to prevent large institutional investors from engaging in what is the equivalent of a bank run and harming individual investors in the process.