Investor Bulletin: Focus on Money Market Funds

The Securities and Exchange Commission recently adopted reforms designed to significantly strengthen the regulatory framework governing money market funds and protect investors. The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about money market funds, including money market funds’ investment objectives and risks. For additional assistance, investors can call the SEC's Office of Investor Education and Advocacy at 1-800-SEC-0330, or ask a question using this online form.

What are Money Market Funds?

Money market funds, sometimes called money funds, are a type of mutual fund that invests in high quality, short-term debt securities, pays dividends that generally reflect short-term interest rates, and seeks to maintain a stable net asset value (NAV) per share (typically $1.00). Many investors use money market funds to store cash or as an alternative to investing in the stock market. Money market funds are different from money market depository accounts offered by banks and should not be confused with them. Money market depository accounts are guaranteed by the FDIC and therefore the principal in that deposit account is fully protected up to the dollar limits established by law. An investment in a money market fund, however, has no FDIC guarantee.

What are the risks of investing in Money Market Funds?

Money market funds attempt to keep their NAV at a constant $1.00 per share while the yield changes over time, which generally reflects changes in short-term interest rates. If a money market fund’s NAV falls below $1.00 (as one money market fund did in 2008 due to losses in the underlying investments), it is known as “breaking the buck,” and investors in the fund will lose money. Also, if short-term interest rates are very low, it is possible that fees charged will exceed the income earned on fund investments, in which case the fund will have losses. As with any investment, you should consider the impact of fees on your investment.

What has the SEC done to strengthen protections for investors in Money Market Funds?

In February 2010, the Commission adopted new rules to significantly strengthen the regulatory requirements that protect money market fund investors. The rules are designed to make money market funds more resilient to severe economic stresses, such as those seen in the fall of 2008, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share. The new rules implement reform in the following principal areas:

• Reducing Risks. Money market funds will have to comply with new conditions designed to limit portfolio exposure to certain short-term market risks:
  • Money market funds will be required to have a minimum percentage of their assets in cash or securities that can be readily converted to cash to pay redeeming shareholders.
    
    
  • Money market funds will be required to invest a greater portion of their assets (97%) in the highest rated securities, in order to limit credit risk in their portfolios.
    
    
  • Money market funds will have to limit the average maturity of their portfolios in order to reduce their portfolios’ exposure to certain risks, such as interest rate risk, associated with longer term securities, including long-term floating rate securities. When interest rates increase, longer term securities may decline in value, which can affect the fund’s ability to sell them to satisfy redemption requests, among other things.

• Periodic Stress Tests. Fund managers will be required to examine the fund's ability to maintain a stable NAV per share in the event of market events such as interest rate increases, higher redemptions, and changes in credit quality of the portfolio.
  
  
• Additional Disclosure. Money market funds will be required to post on their websites their portfolio holdings each month and maintain the information on their websites for no less than six months after posting. Funds also will be required to report monthly to the Commission detailed portfolio information, including a money market fund's "shadow" NAV, or the mark-to-market value of the fund's net assets, rather than the stable $1.00 NAV at which shareholder transactions occur. This information will be publicly available after 60 days.
  
  
• Suspension of Redemptions. A money market fund’s board of directors will be able to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund. This will allow for an orderly liquidation of the fund in the event of a threatened run on the fund.
  
  

Related Information

• Read the Commission’s new rules on money market funds.
• For information on money market funds generally, see OIEA’s Fast Answer on Money Market Funds.
• To watch the Commission’s Open Meeting where the money market rules were adopted, visit the Commission’s open meeting webcast page.