As expected (SEE ALERT: Pull Your Money From Money Markets Now!), the Securities and Exchange Commission has voted 3-2 to implement a number of new rules and regulations surrounding money market mutual funds.
The most significant new rules, as far as individual investors are concerned, are rules which will now allow funds to impose a fee on shareholders who want to sell their shares, or allow funds to halt redemptions altogether.
The New York Federal Reserve Bank in April warned in a paper of the consequences of such a rule:
[T]he possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that would not otherwise occur... Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs...one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds...Got that? The Fed recognizes the possibility of preemptive runs that could spread throughout the money market sector because of these new rules.
Bottom line: The risk of holding funds in a money market fund just increased exponentially. Your money will be much more liquid in an elitist, establishment bank account.
Get your money out of money market funds now!
Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.