Money-market funds reform: an overview

Money-market funds: You might know them as a safe place to park your cash and perhaps gather a tiny bit of interest in the process.

But in Washington, D.C., money funds have been the subject of high drama since the 2008 financial crisis. At issue have been yearslong efforts by the Securities and Exchange Commission to reform the rules under which the funds operate -- to avoid investor panics such as occurred a few years ago.

Those efforts have been dogged by opposition from the mutual fund industry.

Last week the SEC released proposed new rules for the industry. The commission's intent: to help shield the financial system from shocks that could put the economy at risk. Here's an overview:

Q. Why reform the money-market-fund industry?

A. Money funds are more than a safe place for mom and pop to put their cash. They have $2.6 trillion in assets, most of that from corporations, banks and governments. Corporations rely on the funds as a source of short-term financing, making them a major part of the machinery that keeps the country's financial system running.

The reform effort springs from September 2008, when the risk of investor "runs" on money funds became clear. That's when the oldest money fund -- and one of the biggest -- experienced a decline in value. That might not seem like a big deal, since mutual fund values fluctuate with the market all the time. But investors have long expected money funds to maintain a stable value of $1 per share. When the Reserve Primary Fund "broke the buck," dropping from $1 to 97 cents in value, investors panicked.

Within days, they had yanked $300 billion from funds similar to Reserve Primary, helping to bring the short-term credit market to a standstill. Companies struggled to find the funding needed to make payroll and meet other critical expenses. Only intervention by the Treasury Department, which offered to insure the funds, prevented a potentially disastrous chain reaction. Avoiding a replay of this scenario is the SEC's goal.

Q. What is the SEC proposing?

A. The commission has two proposals. The first requires the riskiest kind of money funds to switch from the current system, in which they use a "fixed" share price of $1, to a "floating" share price that fluctuates with the market. The idea is to de-stigmatize changes in fund value. That, in theory, would make panics less likely.

The second proposal attempts to discourage investors from making runs on money funds. It would include charging investors a fee for redemptions during times of stress and giving fund directors the ability to temporarily suspend redemptions for up to 30 days.

Q. To what extent would all this affect average investors?

A. Even if some funds' share prices end up floating, their range of volatility is expected to be minimal. But Jerry Klein, managing director at HighTower's Treasury Partners, worries such a change could for technical reasons make money funds more difficult to use in bank "sweep" accounts, which move money from cash accounts to investment accounts overnight in order to earn a small return.

Also, investors who don't have gains and losses to report under the fixed-price model, in some cases, may be required to report even tiny gains for tax purposes, he says.

At this stage, the proposals are just that -- proposals. Up next is a public comment period. Klein predicts the earliest the SEC commissioners would vote on the reforms would be late this year.