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SEC’s New Money Market Fund Rules

Posted by Larry Doyle on January 29, 2010 10:44 AM |

Sense on Cents once again thanks our friends at 12th Street Capital for providing tremendously useful information and analysis. What do we learn today? The new rules adopted by the SEC for money market funds.

The overview of these rules is provided by Orrick, Herrington and Sutcliffe LLP.  The driving force behind the new SEC rules is an effort to promote greater disclosure and liquidity within money market portfolios. After the crisis of 2008-whenever (it’s not over yet), money market funds were and are much riskier than previously perceived. The risks lay in the fact that these funds invested in a fair amount of risky assets. Now that the government backstop of this industry has ceased, the new rules are needed for the industry to move forward.

Investors need to know that when these rules are effective (sometime  in 2010), funds can ‘break the buck’ ($1.00 NAV, net asset value) and suspend redemptions.  

Navigate accordingly knowing that the money market industry is not what it used to be.

Thanks again to 12th Street and to Orrick for this 2-page overview. Click on image to open pdf document:

LD

  • Bill

    Maybe I’m missing something, but it seems
    that the new rule on breaking the buck and
    suspending redemptions just restates
    reality. If a MM fund gets into that
    position, it will de facto break the buck
    and possibly suspend redemptions, as did the Reserve
    Fund.

    • LD

      Bill,

      you are correct but for many years investors assumed that these funds could never and would never break the buck. The fact is these funds still have more than a little bit of toxic mortgage related assets and are bound to break the buck.

      Just wait for some of these funds to suspend redemptions and it may very well be the death knell for this entire business.

      To be frank, given the very minimal incremental yield in these funds relative to checking or savings accounts,I see no reason why people would or should put any money in them.

      That said, if investors put money into bank accounts make sure you stay under the FDIC limits per account.

      • Bill

        LD, I read another fund broke the buck several
        years ago. Companies have on occasion
        prevented breaking the buck by buying the
        problem assest out of the MM fund, but
        the Reserve outfit lacked this capability.
        That is a reason to stay with a reputable
        capitalkzed company. Same thing applied
        with the auction rate mess, as the bigger
        houses bought the junk back sooner.

        A caveat to staying under the FDIC limit
        is to not play the game of how many times
        you can multiply the coverage through
        multiple names on an account. When a
        bank goes under the FDIC runs all those
        accounts through an acid test to see if
        there is any defect in the way they are
        set up, to avoid coverage. If a clerk fills out a card
        wrong, using the word “and” rather than
        “or”, then you’ve got $250K coverage,
        and the other, say, $250K is an unsecured
        claim against the bank. A friend of mine
        and his wife went through that in the 80’s and managed
        to survive it.

        • LD

          Bill,

          Fabulous color specifically about setting up an account or accounts at FDIC-insured institutions. Thanks.






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