New rules adopted by the Securities and Exchange Commission that govern institutional money market funds were recently announced. As indicated in the SEC’s press release, the new rules are intended to address risks of liquidity runs on institutional money market funds by fund participants.
An important change to the rules governing institutional money market funds is a new requirement for floating net asset values. Historically, a benefit to putting cash into a money market fund was the constant net asset value of $1. Unique asset valuation techniques and fund pricing conventions were permitted in these institutional money market funds in the past but will not be permitted once the new rules are in place.
Upon implementation of the new rules from the SEC, institutional money market funds will value all the investments supporting the money market funds and publish a daily market value which will float based on the market value of the underlying assets. Fund participants will enter and exit the money market fund at the then-current market values.
Several reasons underlie these changes from the SEC. During the market turmoil in 2008-2009, many money market funds struggled to meet liquidity needs at the $1 net asset value. As market values of the assets supporting the money market funds fell, maintaining the $1 net asset value became very difficult for the money market fund providers.
As an organization, the SEC is no stranger to tumultuous capital markets. During the Great Depression in the early 1930s, Congress passed the Securities Exchange Act of 1934, which created the SEC. President Franklin D. Roosevelt named Joseph P. Kennedy, the father of future President John F. Kennedy, as the SEC’s first chairman.
The new SEC rules will allow institutional, nongovernment money market fund managers to implement several different controls to manage fund liquidity during times of market stress. These controls will include fees on fund participants desiring to leave the money market funds and liquidity gates to allow the managers to influence the quantity of funds moving out of and into the money market funds.
Participants in these institutional money market funds should generally benefit from the new rules. However, not until times of significant market stress will the effectiveness of the floating net asset value, potential exit fees and liquidity gates be truly tested.
Kirby Brown is the CEO of Beneficial Financial Group, which is based in Salt Lake City.