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The Securities and Exchange Commission voted 3-2 Wednesday to require some money-market mutual funds to have floating share prices, a measure aimed at preventing dangerous investor runs in financial crises.
Under the new amendments to the money-market mutual fund rule, institutional prime and municipal money market funds would be required to allow their prices to float instead of keeping a stable $1 share price. Big institutional investors could lose principal if the value of the shares falls below $1. But individual investors are not likely to be affected by the changes.
The commission also voted to adopt so-called redemption gates, which allow a fund's board to suspend redemption for up to 10 days if the level of liquid assets falls below 30% and/or impose a 2% fee on redemptions.
http://www.usatoday.com/story/money/...ules/13033749/
SEC official release: http://www.sec.gov/News/PressRelease...9#.U9AvePlhHcs
Matt Levine's summary: http://www.bloombergview.com/article...onest-with-you
Under the new amendments to the money-market mutual fund rule, institutional prime and municipal money market funds would be required to allow their prices to float instead of keeping a stable $1 share price. Big institutional investors could lose principal if the value of the shares falls below $1. But individual investors are not likely to be affected by the changes.
The commission also voted to adopt so-called redemption gates, which allow a fund's board to suspend redemption for up to 10 days if the level of liquid assets falls below 30% and/or impose a 2% fee on redemptions.
http://www.usatoday.com/story/money/...ules/13033749/
SEC official release: http://www.sec.gov/News/PressRelease...9#.U9AvePlhHcs
Matt Levine's summary: http://www.bloombergview.com/article...onest-with-you
But one important thing to keep in mind is that that last paragraph was a lie. The SEC didn't pass any rules saying that your money market fund has to have a floating net asset value, or that it can impose fees and delays on redemptions. Not if you're a human. If you're a corporation or an institutional investor, then yes, that previous paragraph is true,3 but if you're a human you can keep on like before. The net asset value doesn't float4 -- you can still treat your $1,000 investment as, like, $1,000 of "cash" in an "account" -- and no one is going to prevent you from "withdrawing" it.
So now, basically, there's a two-tier in which companies and institutions get to know the cold hard truth about how much their money market investments are worth, but individuals can continue to be coddled in the warm fiction that those investments never lose value.
Why is this? Well here's Mary Jo White:
The second sentence there means: Retail investors really like being coddled. And the first sentence means: Retail money market funds don't have to worry about runs, because retail investors don't run, because retail investors are ... the polite term is, "preternaturally calm"? "Dumb" would be the impolite term? But not dumb dumb. Just, like, rational-ignorance dumb. Regular humans spend approximately zero percent of their time monitoring the quality of their money market investments. So they don't tend to run at the first, or second, or seventeenth, sign of trouble. That makes retail money market funds pretty stable.5
You have to tell companies how much their money market investments are worth, because they pay attention to that sort of thing, but you don't have to tell individuals, because honestly they couldn't care less.
So now, basically, there's a two-tier in which companies and institutions get to know the cold hard truth about how much their money market investments are worth, but individuals can continue to be coddled in the warm fiction that those investments never lose value.
Why is this? Well here's Mary Jo White:
Retail and government money market funds have not to date faced significant runs even in the worst of times .... At the same time, retail investors in particular have come to rely on the liquidity and stability of money market funds, and they lack investment substitutes with similar characteristics, including those that may be available to institutional investors.
The second sentence there means: Retail investors really like being coddled. And the first sentence means: Retail money market funds don't have to worry about runs, because retail investors don't run, because retail investors are ... the polite term is, "preternaturally calm"? "Dumb" would be the impolite term? But not dumb dumb. Just, like, rational-ignorance dumb. Regular humans spend approximately zero percent of their time monitoring the quality of their money market investments. So they don't tend to run at the first, or second, or seventeenth, sign of trouble. That makes retail money market funds pretty stable.5
You have to tell companies how much their money market investments are worth, because they pay attention to that sort of thing, but you don't have to tell individuals, because honestly they couldn't care less.
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