SEC Enacts New Rules to Increase Safety of Money Market Funds
By Ric Edelman
In 2008, the Reserve Primary Fund “broke the buck” — meaning its share price fell below one dollar — when its $785 million investment in Lehman Brothers securities suddenly became worthless. To help make sure that never happens again, the Securities and Exchange Commission has issued new rules governing money market funds.
The rules place new limits on the kinds of securities that money market funds can hold. They also require fund managers to conduct periodic stress tests to determine if the fund’s portfolio is able to respond to shocks such as interest rate changes, higher-than-anticipated redemptions and changes in credit quality of the securities within the portfolio.
These new rules improve safety, but my advice for money market funds* stands: Choose those that invest solely in U.S. Treasury Bills and other securities backed by the full faith and credit of the federal government.
Such funds don’t pay the highest interest rates, but that’s the price you pay for safety. Remember that the Primary Reserve Fund offered an above-average yield — and look what happened.
*An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.