SEC proposes tightened rules for money-market funds after fund 'broke the buck' last year
By Marcy Gordon, AP Business Writer
On Wednesday June 24, 2009, 8:45 pm EDT
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WASHINGTON (AP) -- Federal regulators on Wednesday proposed tightened rules for money-market mutual funds that would require them to hold some assets that could be easily converted to cash and to invest only in the highest quality securities.
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The Securities and Exchange Commission proposal came after a $60 billion money fund "broke the buck," exposing investors to losses that could ultimately reach about 8 cents on the dollar. The value of the Primary Reserve Fund's assets in September fell to 97 cents per investor dollar -- below the dollar-for-dollar level needed for full repayment.
The SEC voted 5-0 to issue the proposed rule changes for the popular money-market funds, which hold about $3.8 trillion in assets, for public comment. The new rules could be approved sometime after that 60-day period.
The funds are a mainstay of financial management for U.S. families and companies, holding themselves out as safe and easily accessible investments that offer returns exceeding those of conventional savings accounts. They generally invest in the safest types of debt such as Treasury bonds, while so-called prime money-market funds seek slightly higher yields but accept marginal risk by venturing into short-term corporate bonds.
During the week in September when the Primary Reserve Fund broke the buck, investors pulled out around $300 billion from prime money funds -- representing 14 percent of the assets in those funds.
"I believe that the proposal ... will go a long way toward better protecting investors and making money-market funds more resilient to short-term market risks," SEC Chairman Mary Schapiro said before the vote.
Money funds that cater to retail investors would be required to hold at least 5 percent of their assets in cash, Treasury bonds or other instruments that could be sold for cash within a day. At least 15 percent of the retail funds' assets would have to be convertible to cash within a week. There currently are no such liquidity requirements.
The change would make it easier for investors to redeem their money from the funds amid a rush of demand.
The liquidity requirements for money funds marketed to institutional investors would be stricter, and the maximum maturity of bonds that money funds can invest in would be shortened to 60 days from 90 days.
The SEC also proposed changes in money funds' operations, such as requiring that they be able to electronically process investors' purchases and redemptions at a price other than $1 a share -- to make it easier for investors to get their money back if a fund "breaks the buck."
The commissioners punted, however, on more fundamental changes to the regulation of money funds, such as substituting a floating share price that would make them more akin to investments like conventional mutual funds whose value goes up and down.
The SEC wants to examine whether a floating price would better protect investors from runs on money-market funds or if the "efficiency" of the $1 price provides a greater benefit, Schapiro said.
The role of credit rating agencies' assessments of money-market funds also will be studied. The industry, dominated by Standard & Poor's, Moody's Investors Service and Fitch Ratings, has been widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities, whose collapse helped set off the global financial crisis. The SEC has been studying proposals to tighten its oversight of the industry.
On the day of the Primary Reserve Fund's blowup, it continued to be rated investment grade by the three big agencies, said Commissioner Kathleen Casey. "There must be a better way," she said.
The commissioners didn't issue proposals for such changes but recommended seeking public comment on them.
The administration's plan for overhauling financial regulation, issued last week, recommended that the President's Working Group on Financial Markets -- which includes Schapiro, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke -- examine whether more fundamental changes are needed to better protect investors in money-market funds.
The SEC plan proposed Wednesday closely reflects recommendations made by the Investment Company Institute, the mutual fund industry's major trade group. The biggest money-market funds are managed by BlackRock Inc., Fidelity Investments, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Vanguard Group, according to Crane Data.
The collapse of the money fund run by Reserve Management Co. last fall was one in the cascading series of troubling events in the financial meltdown. It marked only the second such instance in the nearly four decades that money-market funds have been available to keep money safe and readily accessible while earning a modest return.
The "breaking of the buck" by the Primary Fund -- the first U.S. money fund, established in 1970 -- stoked fears over the safety of the trillions held in the money funds.
After investment bank Lehman Brothers filed for bankruptcy protection on Sept. 15, New York-based Reserve Management's board declared its $785 million investment in Lehman debt's worthless. That triggered a rush of orders from institutional clients to pull money out of the fund, gutting the fund's value as its managers were forced to sell assets amid sharply declining markets.
The Treasury Department stepped in with a temporary program to guarantee money-market funds, but the Primary Fund didn't qualify and had to liquidate.
The SEC last month charged Reserve Management and its two top executives with civil fraud, saying they withheld key facts from investors. The firm and the executives said they would defend themselves against the SEC's allegations.
... karena sudah 3 kali gw mengalami LIKUIDASI reksa dana pasar uang, bahkan 2 dari MI yang sama ... jadi, seharusnya KETENTUAN di atas diberlakukan juga di semua reksa dana pasar uang indo ... MAU?
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