New SEC plan for money market reforms

A portion of the $2.6-trillion money market fund industry would be required to fundamentally change how it prices its shares, under a proposal released by U.S. regulators on Wednesday.

Funds could also charge withdrawal fees and delay return of funds to customers in times of financial distress, under the federal Securities and Exchange Commission's proposal.

The SEC plan comes after a long debate over whether changes made in 2010 were enough to avoid a repeat of a run on money market funds seen at the height of the financial crisis.

In 2008, the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as "breaking the buck." That failure ignited a run by investors across the money fund industry, cutting off a major source of overnight funding for many corporations.

In 2010, the SEC adopted rules that bolstered fund transparency, tightened credit quality standards, shortened the maturities of fund investments and imposed a new liquidity requirement.

For years, proponents of further reform have raised concerns that money market funds -- mutual funds that invest in short-term debt securities -- can be considered as safe as bank deposits even though they do not have a government guarantee.

The fund industry has warned that further major reforms could kill investor interest in money market funds.

In a compromise move, the SEC's plan mostly focuses on prime funds for institutional investors, which are seen as more prone to runs.

The SEC estimated that institutional funds represent 37 percent of the market with $1 trillion in assets.

The SEC's plan calls for two alternative proposals that it said could be adopted alone or in combination.

In the first, prime funds used by institutional investors could be required to transition from a stable, $1 per share, to a floating net asset value (NAV) -- a move designed to reduce the risk of runs like those during the financial crisis.

The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not have to move to a floating NAV. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.

The industry has long fought against moving away from a stable share price, which it says is appealing to investors looking for a safe product.

The second proposal, meanwhile, would give fund boards for institutional and retail funds the authority to impose so-called "liquidity fees and redemption gates" during times of stress.