This summer the SEC finally issued its long-awaited new Money Market Fund (MMF) rules, with the hopes of avoiding a future run on money markets similar to what happened during the 2008 financial crisis when the Reserve Primary (money market) fund “broke the buck” due to its holdings in short-term Lehman bonds and the Treasury and Federal Reserve had to intervene in the MMF marketplace to stem the panic by providing a series of temporary guarantee programs to protect shareholders.
After applying some modest initial reforms in 2010, and considering a wide range of potentially more significant money market reforms going forward – from floating NAVs to allowing for redemption fees and gates during times of crisis – the SEC has ultimately adopted a combination approach. As Duane Thompson explains in this guest post, the new rules from the SEC will provide for floating NAVs for institutional money market funds, redemption fees (up to 2%!) and gates (limiting investor liquidations) for retail and institutional funds that can be imposed by fund boards during times of financial stress, and reduced limitations for money market funds that invest purely in government bond holdings (so-called “government money market funds”) due to their reduced riskiness (though governmental MMF boards can still potentially apply redemption fees and gates if necessary). Fortunately, the new rules also require money market funds to hold greater liquidity buffers (reducing the risk of problems in the first place), and dramatically reduce the permitted use of derivatives in many types of MMFs.
Nonetheless, the end result of these reforms may potentially be a significant shift into government money market funds to avoid these potential limitations, and while consumers and institutions may ultimately still prefer what will likely be the slightly higher yields of non-government money market funds, the decision to use them – and face the floating NAVs, or redemption fees and gates that may apply – will have significant implications regarding money market fund due diligence obligations for advisors. In fact, greater money market fund reporting requirements may leave advisors with little excuse for not having done effective money market fund due diligence in the future!