The Securities and Exchange Commission is considering making significant changes to money market mutual funds because there is still a danger that these funds could be unable to meet redemptions when investors begin to step off the sidelines en masse and move back into equity markets. The fund was forced to freeze redemptions, which spurred a panic in other money funds and caused investors to pull $133 billion from prime money market funds in two days. In June, the SEC will consider radical changes to Rule 2a-7, including the elimination of the stable $1 NAV, limiting a fund’s size relative to its respective market, requiring minimum cash reserves such as 10% of the fund’s total assets, and requiring money funds to have insurance guarantees similar to the Federal Deposit Insurance Corporation’s bank guarantee. While largely ignored by the press, these alternative investment vehicles also had problems last year, and money fund advocates warn that if the SEC clamps down too hard on money market mutual funds, assets will migrate to these areas. Donohue said money funds’ stable $1 NAV structure is vulnerable to breaking the buck because large, sophisticated investors will watch to see if a fund starts to slip and quickly redeem their shares in the fund, leaving the loss for the remaining shareholders. read more

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