When Is a Buck Not a Buck?

Note:  This is a follow up piece to our August 15th interview with an industry expert regarding the recently adopted SEC reforms.

In the wake of the Lehman Brothers failure in September of 2008, the Reserve Primary Fund, the oldest money fund in the nation, “broke the buck” and fell to 97 cents per share. On September 17, 2008, investors redeemed a record $140 billion from money market funds and the commercial paper market, which banks rely on to fund their day-to-day business, essentially froze. The Treasury stepped in to establish the voluntary Money Market Funds Guarantee Program in order to stop the run on money market funds, but vowed never to do so again.

The Securities and Exchange Commission was obliged to do something. On July 23, 2014, the SEC adopted amendments to the rules that govern prime money market mutual funds. The SEC aims to re-tool institutional money markets behavior by using a combination of floating Net Asset Value (NAV), fees and gates to protect investors and the financial system.

What is the worst possible outcome of this regulation?

Institutional money market funds fear that a floating NAV, along with the other required management changes, will make the funds unappealing to investors. The regulation underlines the fact that money market funds are not risk free, as the stable NAV previously suggested and investors may prefer to invest elsewhere.

What can be the alternative funds?

FDIC insured products and government money market funds are exempt from the rules and are more competitive now that prime money market funds appear less stable. Overall? Expect change in money market funds and opportunities for other investment fund ideas before the rules are fully implemented in the fall of 2016. Email me your questions and commentary about these changes.

Katherine Brown is a Research Associate at Castle Rock Investment Company and can be reached at Katherine@castlerockinvesting.com.