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 The U.S. Securities and Exchange Commission's reform will force
institutional "prime" money market funds to float their share price,
a major change from the current convention that allows them to
maintain a stable $1 per share net asset value. The new rules also
would allow money funds to impose fees and restrictions on
withdrawals during times of extreme market stress.
"Why would anyone stay in these money funds once they’re floating,
rather than just go to a government or treasury fund that’s not
floating at all?” said Diahann Lassus, president of Lassus Wherley &
Associates, a New Jersey financial adviser.
Institutional prime money funds attract mostly professional
investors and are considered more risky because of their exposure to
short-term corporate debt. Investment advisers say money could flow
away from these funds and into funds composed of safer government
securities.
Bank-insured sweep accounts will be a clear alternative for the
safety-first crowd, while short-duration bond funds appeal to
investors hunting for higher yields, financial advisers said.
Money funds already have lost some luster during an extended period
of near-zero interest rates. Investors typically receive yields of
0.01 percent on their money, a losing proposition if you factor in
inflation.
Money fund providers have waived some $24 billion in fees over the
past five years to give customers that yield.
Marie Chandoha, President and CEO of Charles Schwab Investment
Management, a top money fund provider that oversees $158.2 billion
in those investments, downplayed the new SEC rule imposing barriers
or penalties on withdrawals.
"It's an extreme scenario where this would even be considered,"
Chandoha said.
Mike Vogelzang, who is president of Boston Advisors LLC, an
investment management company with about $2.8 billion in assets
under management, said some of his clients might push back against
the rules. And if they do, he will suggest they use a bank-insured
account for cash, he said.
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"Most of this is going to be about education and having them
understand that a dollar is not a dollar any more in these money
market funds," Vogelzang said.
Annapolis, Maryland-based financial adviser Martin Hopkins, said the
new rules will help investors understand they can lose money.
"Most clients see these as just like cash, and they are not,”
Hopkins said in an email.
Short duration bond fund assets, among the vehicles advisers think
will benefit from a possible exit from MMFs, have already surged in
recent years because of relatively high yields.
At the end of June, short duration bond fund assets totaled $319.4
billion, up 172 percent from $117.6 billion at the end of March
2009, at about the same time the stock market hit rock bottom.
(Reporting By Tim McLaughlin; Additional reporting by Sarah Lynch in
Washington D.C.; Editing by Richard Valdmanis. Editing by Andre
Grenon)
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