The Securities and Exchange Commission has voted unanimously to propose rules aimed at reforming the money market funds industry to make it less susceptible to investor runs.

The SEC’s proposal includes two alternative reforms, which could either be adopted separately or together. One reform would require a net asset value for prime institutional money market funds; the other allows the use of liquidity fees or redemption gates in times of stress.

The SEC’s investigation into money market funds was prompted by the 2008 financial crisis, when the Reserve Primary Fund “broke the buck,” re-pricing its shares below its $1.00 stable share price. A fund generally does this when its market-based value deviates more than 0.5 per cent from its stable $1.00 share price.

The way they currently operate, money market funds exist as a result of a special exemption granted by the SEC three decades ago. This exemptions allows them to try and maintain a stable $1.00 net asset value by penny rounding and amortized cost accounting, meaning they do not have to comply with the same mark-to-market valuation standards required for all other mutual funds.

The industry now holds more than $2.9 trillion in assets, the majority of which is in institutional funds, according to the SEC.

The proposed reforms

The “alternative one” reform requires institutional money market funds to operate at a floating NAV, with the idea of improving the transparency of risks, the regulator said. Rather than “penny rounding” their share price, these funds would have to round it to the nearest basis point.

Government money market funds – defined as any fund holding at least 80 per cent of its assets in cash, government securities, or repurchase agreements collateralized with government securities – would be exempt. Retail money market funds would also receive an exemption. These would be defined as funds where each shareholder’s redemptions are limited to $1 million per business day.

The “alternative two” proposal would allow these funds to retain a stable share price but introduce a 2 per cent “liquidity fee” on redemptions whenever a fund’s level of “weekly liquid assets” falls below 15 per cent. However, the proposal allows some discretion on the part of the board directors, who can decide that this fee is “not in the best interest of the fund” and choose not to impose it.

The up to 30-day redemption gate option, which forms part of the second proposal, would also be at the discretion of the board directors.

Government – but not retail – money market funds would be exempt from the second proposal, although could choose to opt in.

The SEC says on its website: “The Commission is considering whether to combine the floating NAV and the liquidity fees and gates proposals into a single reform package. If adopted in that form, prime institutional money market funds would be required to transact at a floating NAV and all non-government money market funds would be able to impose liquidity fees or gates in certain circumstances.

"The Commission requests public comments on the benefits and drawbacks of a single reform approach."