The Securities and Exchange Commission today voted unanimously to propose rule changes for the $3.8 trillion money market mutual fund industry — including new liquidity requirements to prevent runs on such funds.
Many of the proposals were developed because of the massive withdrawals from money funds that occurred after the Reserve Primary Fund, from Reserve Management Co. Inc. in New York, in September fell below a $1-per-share net asset value, or “broke the buck” in Wall Street parlance.
The event “spurred a significant wave of redemptions from money market funds, principally from institutional investors in prime money market funds,” said SEC Chairman Mary Schapiro. “It also increased instability in the credit markets and impacted thousands of investors who could not redeem their Reserve Primary Fund holdings at the $1 price they had come to expect.”
Under the proposal, funds would be prohibited from purchasing illiquid securities and anything less than the highest-quality security — such as so-called second-tier securities.
Also, they would be required to hold a certain percentage in cash or Treasury securities so that could be converted to cash easily.
The proposal would also lower the weighted average maturity of the portfolio to 60 days, from 90 days. In addition, it would institute a 120-day weighted average life maturity, limiting the funds’ investment in long-term floating-rate maturities, the agency reported.
New disclosure requirements are also proposed.
Funds would be required to do monthly reporting of holdings to the SEC as well as post the information on their website for investors. They would also have to conduct periodic stress tests to evaluate the fund’s ability to maintain a stable asset value.
The proposal would also give funds the ability to process shareholder redemptions at a price other than $1 to help avoid delays in processing redemptions if a fund broke the buck. And the fund board of directors would be able to suspend redemptions if the fund broke the buck and the fund company decided to liquidate it.