New Money Fund Rules

Money markets funds are supposed to provide investors with easy access to cash. New SEC rules, combined with severe economic pressure, are ensuring just the opposite.

Investors who wearied of lackluster yields on money fund accounts pulled cash out of them to the tune of almost $1 trillion, about 20% of total assets, since early last year.

Those who are still in these funds aren’t likely to be happy about new rules being put into play by the Securities and Exchange Commission, which will put more pressure on rock-bottom returns. According to market analysts, current yields, which are averaging about 0.5%, could hit zero and some funds may even “break the buck,” dipping below the customary price of $1 per share.

Starting in May, the new SEC rules would force the funds to buy securities with shorter maturities and therefore lower returns. The maximum weighted average maturity will be lowered to 60 days from 90 days, and a fund would have to put 10% of its assets into one-day securities and 30% into those that mature in a week.

The rules will make the funds safer, say SEC officials, but fund officials maintain that the new regulations could lower yields by 0.1 to 0.2 percentage points. In a more normal interest rate environment, that decrease would not be significant, but with yields already so low, it could push returns to zero.

Many money funds have already waived management fees to avoid breaking the buck. If interest rates rise, as many analysts expect they will later this year, the increased yields are likely to go into restoring those fees rather than to upping the yield for investors. Also, according to the SEC, if the fund threatens to break the buck, the fund’s board can suspend withdrawals, meaning investors would not be able to get their money out. That would eliminate an investor’s easy access to his/her cash, one of the primary reasons for choosing a money fund