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Regulators planning 'structural reforms' to money-market funds

February 07, 2012|By Nathaniel Popper
  • The ultra-safe reputation of money-market funds came into question during the financial crisis.
The ultra-safe reputation of money-market funds came into question during… (Bagus Indahono )

Reporting from New York — Regulators are planning to propose reforms that could dramatically change one of the most popular types of investment, the money-market fund.

The staff at the Securities and Exchange Commission is drawing up new rules that would govern the $2.7-trillion money-market fund industry after the ultra-safe reputation of the funds came into question during the financial crisis.

Money-market funds have long provided the safety and accessibility of a checking account with slightly higher returns thanks to a strategy of making almost riskless short-term loans. During the crisis, however, one of the most popular money-market funds lost money, causing panic among investors and threatening the short-term funding market used by financial institutions.

The SEC made reforms to money-market funds immediately after the crisis that did little to change their popularity or basic approach.

Now, however, the commission's chairwoman, Mary Shapiro, is "advocating structural reforms to money-market funds to address their susceptibility to runs and provide a buffer against losses," according to a statement from SEC spokesman John Nester.

The plans would need to be approved by the commission's five-member board, but they are already the subject of harsh blowback from fund managers, according to the Wall Street Journal, which first reported the reform proposal.

Some of the most popular managers of money-market funds have seen their shares drop this morning. Federated Investors, which told the Journal it might sue the SEC to stop the reforms, was recently down 4.7% on a day when leading indexes are up.

The reforms would scrap the money-market funds traditional practice of making each share worth $1, and would also make it harder for investors to immediately withdraw all of their money, the Journal reported.

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