New Money Market Fund Rules: What They Are and What We Think

Posted by The Dopkins Wealth Team | Mar 24, 2016 3:31:38 PM


In 2014, the Securities and Exchange Commission (SEC) released new money market fund rules. Effective by October 2016, the biggest changes pertain to their liquidity and who can hold certain funds.

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Money markets must designate their funds as either “retail” or “institutional.” Institutional money markets are required to have floating net asset values (NAVs). Retail money markets are not subject to this requirement and may seek to have a stable $1 NAV. Retail funds must be held by individuals and are not open to institutions, businesses and other organizations.

Both retail and institutional funds could be subject to liquidity fees or redemption gates once the new rules go into effect. These new tools are designed to prevent runs on the fund during periods of high stress. All prime and municipal money markets will be subject to the potential fees or gates. A prime fund is one that does not fit into the government or municipal category. Typical investments are corporate bonds and commercial paper. As an example, if prescribed liquidity levels fall below a certain threshold, the fund could impose a 2 percent liquidity fee on redemptions. The fund may also suspend redemptions for up to 10 days while markets settle.

U.S. Treasury and government funds are exempt from the floating NAV, liquidity fees and redemption gate requirements. Because of this, there will be no retail or institutional designation for these funds. The SEC requires that 99.5 percent of the funds be invested in cash, government securities or repurchase agreements that are fully collateralized. At this point, the designated “core” money markets at Schwab, Fidelity and TD Ameritrade will be U.S. Treasury/government funds.

Our Take

With these new regulations, our approach remains consistent. We continue to recommend investing in U.S. Treasury or government money market funds. They offer the highest combination of safety and liquidity. As long as money market fund yields remain very low, there is no reason to denigrate credit quality or create potential illiquidity for minimal additional yield. Investors with larger money market fund balances may find it advantageous to determine whether there are better options based on their specific liquidity needs. Contact us to discuss. 

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 Copyright © 2016, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.

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Topics: money market funds, retail money markets, institutional money markets, net asset values, money market fund rules, NAV

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The Dopkins Wealth Team Dopkins Wealth Management (DWM) is an investment advisory and consulting firm that specializes in providing comprehensive wealth management services by incorporating tax planning, business succession planning, wealth preservation, and wealth transfer into our investment strategies and fiduciary-based solutions. Whether it’s an individual, institutional investor, Corporate 401k plan, foundation or endowment, our clients benefit from our use of an investment strategy grounded in academic research that focuses on long-term success. The key to our client’s success is our ability to understand their unique financial goals and needs, and integrate that with their need, ability, and willingness to take risk to formulate a long-term plan for financial security and prosperity. For more information, contact Tom Emmerling at temmerling@dopkins.com.

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