Sunday, February 8, 2015

WARNING: The SEC Has Given Money Market Mutual Funds Permission to "Temporarily" Halt Redemptions

By Robert Wenzel

New rules have gone into the Federal Register that involve money market mutual funds.The rules became effective October 14, 2014. They are Securities and Exchange amendments to money market mutual fund regulations.

Specifically, they allow money market funds to charge redemption fees and "temporarily" halt redemptions during times of "stress."

From the SEC (my emphasis):
The Securities and Exchange Commission (“Commission” or “SEC”) is adopting
amendments to the rules that govern money market mutual funds (or “money market funds”) under the Investment Company Act of 1940 (“Investment Company Act” or “Act”). The amendments are designed to address money market funds’ susceptibility to heavy redemptions in times of stress, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, their benefits... The SEC... is adopting amendments that will give the boards of directors of money market funds new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee if a fund’s weekly liquidity level falls below the required regulatory threshold, and giving them discretion to suspend redemptions temporarily, i.e., to “gate” funds,under the same circumstances. These amendments will require all non-government money market funds to impose a liquidity fee if the fund’s weekly liquidity level falls below a designated threshold, unless the fund’s board determines that imposing such a fee is not in the best interests of the fund.
Bottom line: Money market funds can no longer be considered a safe haven for your funds during a period of crisis. Because of these new rules, you may be charged fees (of up to 2%) or you may be prevented from withdrawing funds during a crisis period.

Further, it creates a herd mentality environment among money market fund managers, since they know that if they are making the same mistakes and taking on the same aggressive risks as other managers, because of these new rules, they will be able to freeze funds during a period when such risks become obvious and money market account holders attempt to redeem their funds.

Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

(ht Adam Munter)

1 comment:

  1. There's also been talk about limiting redemptions in regular intermediate-term bond funds.