WASHINGTON – Regulators have voted by a narrow margin to end a longtime staple of the investment industry – the fixed $1 share price for money-market mutual funds – at least for some money funds used by big investors.
The idea is to minimize the risk of a mass withdrawal from the funds during a financial panic.
The Securities and Exchange Commission also is letting all money funds block withdrawals when their assets fall below certain levels or impose fees for withdrawals.
The new rules were adopted Wednesday on a 3-2 vote, culminating several years of regulatory haggling and false starts. They were opposed by one Democratic and one Republican commissioner.
The fund industry will have two years to comply, a shorter period than the industry had sought. The share prices of the funds involved will be required to “float,” as with other mutual funds, reflecting the market value of a fund’s holdings at a given time. Big institutional investors could lose principal if the value of the shares falls below $1. Individual investors likely won’t be affected.
The floating-price requirement applies only to prime institutional funds, which are considered riskier. They represent about a third of money-market funds, according to the SEC. Those funds attract mainly big institutional investors and are considered more risk-prone because they invest in short-term corporate debt.
The idea behind adopting floating prices for a portion of the $2.6 trillion money-market fund industry is to remind investors that while the funds are safer than stocks and many other investments, they still carry some risk. Regulators say greater awareness of the risk would reduce the potential for crippling runs on money funds because investors would have acclimated themselves to fluctuating prices.
The SEC action will also “provide important new tools that will help further protect investors and the financial system in a crisis,” SEC Chair Mary Jo White said at a public meeting of the five-member commission.
The Financial Stability Oversight Council, a group of high-level regulators that includes the heads of the Federal Reserve and the Treasury Department, has identified money-market funds as a potential risk to the global system. The council pressed the SEC in 2012 to require a floating rate for all money-market funds, and it wasn’t immediately clear whether it considered the new rules satisfactory. The FSOC, which is led by Treasury Secretary Jack Lew, issued a statement Wednesday saying it would examine them. Money-market funds are on its agenda for a closed meeting July 31.