U.S. investors are used to treating money-market mutual funds as the equivalent of a checking account. That is about to change for the riskiest of the funds.
The Securities and Exchange Commission votes today to adopt new rules that will change the way prime money funds price their shares. Instead of a stable price of $1, which means a dollar invested can always be redeemed for $1, prime money funds would have to price their shares in a way that will reveal fluctuations.
The SEC’s vote concludes a four-year struggle by regulators to toughen rules after a run at one fund during the 2008 financial crisis brought the $2.6 trillion industry to near- collapse, halted only by a federal backstop.
The strongest of the new measures are reserved for prime money funds, which cater to institutional investors and buy riskier securities, such as commercial paper. Retail investors won’t see changes in how their shares are priced.
The rules will be closely examined by money-fund managers such as Federated Investors Inc., which fought the plan arguing that a floating-share price won’t prevent the type of investor flight that occurred in 2008.
The SEC has sought to calibrate the new rules so that money funds remain a useful alternative to bank deposits.
“It neither makes money-market funds into banks or something akin to banks, nor walks away from the problem,” said former SEC Chairman Elisse B. Walter, who helped draft the proposed rules last year. “It is very much an appropriately tailored and powerful answer to what happened during the financial crisis.”
Industry Opposition
Business groups such as the U.S. Chamber of Commerce have fought the changes, arguing they will destroy the appeal of money funds, which have become bank-like products that corporations use to manage cash. The move to a floating share price also could require corporate investors to pay taxes on gains and losses, making them more complex to use, the Chamber argues.
Boeing Co. would move its cash out of the types of funds, known as prime funds, whose share price could fluctuate, said Verett Mims, the company’s assistant treasurer. Boeing has $2 billion to $3 billion invested in money funds, most of that in prime funds, she said.