Will the New Money Market Rules Affect You?

The Securities and Exchange Commission (SEC), the government agency that regulates the investment industry, recently announced new rules changing how money market funds operate. Subtle regulatory changes may sounds like esoteric legal minutia, but many investors have some of their wealth in money market funds: in total more than $2.5 trillion is invested in these funds. So will the new rules affect your portfolio? The answer is that the changes are somewhat limited, so (at this point) they probably won’t have much of an effect on individual investors.

Mary Jo White
SEC Chair Mary Jo White

The most headline-grabbing change relates to the constant one dollar per share value that money market funds maintain. This constant value makes them very low-risk investments, but can create problems if the company that manages the fund can’t maintain that one dollar per share guarantee (which happened to a large money market fund during the financial crisis in 2008). The SEC therefore considered eliminating the constant one dollar per share value, forcing the price of the funds to vary based on their underlying investments (just like other mutual funds).

In the end they only applied this change to “institutional” money market funds, which are used by large investors such as pension funds and endowments. Most individual investors generally can’t invest in these institutional funds, although there are a few exceptions (there are sometimes institutional money market funds in 401k plans, for example).

A second change helps money market funds to implement policies to prevent withdrawals from the fund in the event of a crisis. Though this change could affect investors who expect to be able to redeem their investment in a money market fund at any time, it would only apply in extremely rare situations (such as a financial crisis).