More than nine months after one of the oldest and largest money market funds suffered such severe redemptions that the net asset value of its shares fell below $1, the SEC is proposing structural and regulatory changes for money markets so it doesn’t happen again.
The SEC’s proposal, for which it seeks public comment but has not yet been posted to the SEC site, would require money market funds to keep a portion of their portfolios in cash or cash equivalents, reduce their exposure to long-term debt and limit their investments to high-quality securities (no “second tier” securities). It also would require monthly reporting of holdings, periodic stress tests and allow the suspension of redemptions if a fund “breaks the buck” in order for an orderly outflow of funds to investors.
The SEC vote was 5-0 to send the proposed rule changes to the public for comment. Money market funds are very popular (worth about $3.8 trillion) and regarded by investors as very safe, cash equivalents.
In May, the SEC filed fraud charges against executives of The Reserve Primary Fund, a $62 billion money market fund that “broke the buck” when its $785 million position in Lehman Brothers debt went to $0 on September 15, the day Lehman declared bankruptcy. Investors attempted to withdraw $40 billion from the fund within hours, eventually forcing the NAV down to 97 cents (“breaking the buck”). The SEC alleges the executives “significantly understated the volume of redemption requests received by the fund and failed to provide the trustees with accurate information concerning the value of Lehman securities. Because of these misrepresentations and omissions, the fund was unable to strike a meaningful hourly net asset value as required by the fund's prospectus.”