SEC Proposes Reforms for Money Market Mutual Funds

On June 5, 2013, the U.S. Securities and Exchange Commission proposed major changes to certain “prime” money market mutual funds (MMF).  The changes could dramatically alter investors’ perceptions and use of MMFs.  There is a 90-day public comment period after which these proposals could be imposed. 

One of the most desirable features of MMFs is a stable $1 per share Net Asset Value (NAV).  MMF interest rates float in order to preserve a constant $1 per share value.  During the recent financial crisis, in September 2008, the Reserve Primary Fund MMF “broke the buck” because of the fund’s investment in Lehman Brothers securities that became essentially worthless.  The NAV only dropped from $1.00/share to $0.97/share but that elicited a run on the fund and called into question whether other MMFs would also break the buck.  The Federal government had to quickly step in to guarantee the value of MMF shares owned prior to September 19, 2008 to prevent a potential collapse of the MMF industry.  This guarantee expired September 18, 2009 with no losses and the government has been struggling for years to come up with some solutions to avoid the need to make such a guarantee again. 

One of the SEC’s proposals is to require the NAV of institutional MMFs to float to the nearest 1/100^th of 1% ($1.0000 per share instead of $1.00 per share) in response to market conditions.  Exempted from this proposal are prime retail MMFs that limit redemptions to $1 million per day and government MMFs that are at least 80% invested in government securities.  This is a major change and could very well cause the run on MMFs that the government is trying to prevent. 

An alternative SEC proposal is to allow MMFs to impose a 2% redemption fee on investors or suspend redemptions for up to 30 days during periods of “market stress” in order to reduce the likelihood of a run on the MMF.  Government MMFs are exempt (unless they voluntarily opt in) but institutional and retail MMFs are subject to this proposal.  Most people think of MMFs as safe-havens for their cash, even though there is no FDIC insurance for MMFs.  This proposal changes the liquid nature of MMFs that investors find appealing.  If adopted, this proposal could prevent investors from accessing their money during times of financial turmoil.  Part of the concept of “safety” means that investors can access their money when they need to, and charging redemption fees or preventing access will be unpalatable to many investors.  Such investors should instead consider bank money market accounts if this alternative proposal is adopted.

Update
The IRS issued Notice 2013-48 in which it said that the wash sale rule wouldn't be applied to losses recognized from a floating NAV for MMFs as long as the loss did not exceed 0.5% of the tax basis in the shares redeemed.  The wash sale rule disallows a loss on the sale of securities if substantially identical securities are purchased in the period beginning 30 days before and 30 days after the date of sale.