The Impact of the SEC’s Money Market Fund Reforms

On October 14, 2016, the Security and Exchange Commission (SEC) implemented significant reforms for money market funds, marking a crucial shift in how investors and fund providers approach short-term cash investing. These reforms ushered in a new era of scrutiny and strategic evaluation for both investors and providers.

With a staggering $3 trillion invested in money market funds, the implications of these changes were vast, impacting the risks and yields for individual, retail, and institutional investors, as well as the providers of these funds.

The Rational Behind Money Market Fund Reform

The catalyst for the reforms can be traced back to the 2008 financial crisis when the Reserve Primary Fund infamously broke the $1 NAV threshold due to substantial losses from failed Lehman Brothers loans. This event triggered a mass exodus of institutional investors, leading to the fund’s collapse.

In response, the SEC introduced new rules in 2014 to fortify the stability of money market funds. These regulations mandated stricter portfolio restrictions, increased liquidity requirements, and a transition from fixed $1 share prices to a floating net asset value, introducing a newfound element of risk.

Among these changes, fund providers were required to impose liquidity fees and suspension gates to prevent a run on funds.

Impact on Retail and Institutional Investors

Retail investors were shielded from the floating NAV shift but were subject to redemption triggers, prompting some to shift to government money market funds for security.

Conversely, institutional investors faced a dilemma, torn between pursuing higher yields in riskier options or opting for the safety of U.S. government money markets.

Adapting to Change: Fund Providers’ Response

Post-reform, major fund groups like Fidelity Investments and Vanguard swiftly adapted to offer viable alternatives to investors, ensuring liquidity and stability in their funds.

Some providers, weighed down by compliance costs, opted to exit the money market fund arena, exemplified by Bank of America Corp.’s 2016 sale of its business to BlackRock Inc.