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Preparing for the New Money Market Fund Rules

Last update on: Apr 21 2016

It isn’t too early to decide how to adjust to the new money market rules that take effect October 16. Recall that in the wake of the financial crisis, after some funds “broke the buck,” the Securities & Exchange Commission issued revised rules in 2014.

The new rules divide money funds into six categories. See our November 2014 visit for details.

What you need to know is that Treasury and Government money market funds don’t change. Funds with other investment policies do. Institutional funds face a special rule. An institutional fund is one that isn’t designed to limit its shareholders to natural persons.

Institutional funds have to use floating net asset values carried to four decimal places instead of fixing them at $1.00.

All funds that aren’t Treasury and Government funds can be subject to liquidity or redemption fees up to 2% imposed by their boards when a minimum percentage of assets isn’t convertible into cash. Further, limits on redemptions (redemption gates) of up to 10 days may be imposed when the fund falls below minimum liquidity standards.

The funds also have to disclose net asset values as well as daily and weekly liquid asset percentages on their web sites.

Some fund sponsors already changed the rules for their funds so that any non-natural persons are kicked out of what they consider retail funds. Some simply closed their institutional funds and some other funds.

You can avoid floating net asset values, liquidity gates, and redemption fees by investing in U.S. Treasury- or Government-only funds. But you’ll likely earn a lower yield than from the alternatives.

You also can move your short-term cash to a fund I mentioned in the past, U.S. Global Services Near-Term Tax-Free Bond (Ticker: NEARX; 800-US FUNDS; This no-load fund seeks to generate tax-free monthly income and preserve capital. It is one of only a few with positive total returns for each of the past 20 years. Management also has kept the net asset value very stable. The recent yield was 1.40%. Details are in Portfolio Watch in our September 2015 visit.

Other options are to move your cash to short-term bond funds, certificates of deposit, or even fixed deferred annuities. These aren’t complete substitutes for money funds but aren’t subject to the new rules.

RW March 2016.



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