Our Thoughts

Quick and Easy Guide to the 2016 Money Market Fund Changes

Even if you’re invested in a money market fund, you may not have given them much thought. So you may have missed the SEC’s announcement two years ago that they were going to be making some substantial adjustments to the rules regarding these investments. The most noteworthy of the changes are scheduled to be in place by this coming October.

What is a Money Market Fund?
For those just tuning in, a money market fund is an open-ended mutual fund that invests in short-term debt securities like Treasury bills. They are commonly thought to offer the same security as putting money in the bank, while offering a higher yield.

Why is the SEC making big changes to the rules governing money market funds?
During the 2008 financial crisis, the value of the Reserve Primary Fund (one of the biggest MMFs) dropped below a dollar a share (known as “breaking the buck”), which led to significant redemptions of institutional money market funds, putting them under a lot of stress. The new rules should provide additional stability for money markets, while also providing shareholders with additional protections.

Am I affected?
The SEC is drawing a line between “retail” investors and “institutional” investors. Retail funds are those which benefit “natural persons” (a fancy way of saying human beings). In addition to anyone with a SSN, this also covers individual beneficiaries of trusts and participants in defined contribution plans. Retail funds will continue to maintain a $1.00 share price.

What will change for the institutional funds?
Institutional funds – those that are primarily marketed to corporations and fiduciaries – will now be required to transact with a variable net asset value, to better reflect the fair value of the investments held by that fund. Also, institutional customers will no longer be eligible to participate in retail sweep accounts.

What is a sweep account?
A sweep account is a bank account that automatically transfers any amounts that exceed a certain level into a higher interest earning investment (typically a money market fund) at the end of each business day. This allows the customer to benefit from the higher levels of interest with minimal effort.

Why are only institutional funds being required to change?
In times of market stress, institutional investors will likely be the first to figure out that the fund’s assets are losing value and start pulling out their money. They also tend to control the largest amounts of the fund.

What do I need to do if I have an institutional account?
Defined benefit plans, endowments, corporate, and other institutional accounts will need to transfer any retail money market assets (purchased or sweep) into funds that have been classified as “institutional-eligible” by October 2016. If your institutional account has a sweep feature, your custodian will automatically transition those assets into a qualifying cash feature.

Are there any changes that could affect my retail MMF?
ALL money market funds will have the ability to put a temporary hold on withdrawals and redemptions, or to impose fees on those redemptions, should market conditions warrant it and it is in the best interest of the fund or shareholders.

Bottom Line:
The changes described should not require action on your part, though you may notice changes initiated by your custodian. These new regulations are designed to ensure liquidity and transparency and protect investors in money market funds.