Be careful how much cash you put in your money market fund.
The Securities and Exchange Commission has passed a new rule that allows the funds to prohibit redemptions in times of duress.
A fund can now prevent people from taking their money out if three conditions are fulfilled:
• The fund’s share price falls below the fund’s stable net asset value per share.
• The fund’s board of directors approves liquidation of the fund.
• The fund notifies the SEC of its decision to liquidate and suspend redemptions.
The new rules are part of an SEC effort to strengthen money market funds in the wake of the 2008 financial crisis. In September, 2008 the Reserve Primary Fund became only the third fund in history to break the buck – reduce its share price below $1.
Investors in the fund then tried to exit en masse, and the fund suspended redemptions.
Some investors are still trying to get their money back.
“We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares,” the SEC wrote in explaining the rule.
“Accordingly, our proposal is limited to permitting suspension of this statutory protection only in extraordinary circumstances.”
The pundits at ZeroHedge.com are aghast at the new rule.
“The next time there is a market crash, and you try to withdraw what you thought was ‘absolutely’ safe money, a back office person will get back to you saying, ‘Sorry, your money is now frozen. Bank runs have become illegal,’” they wrote.
The SEC’s approval of the new rule explains why money market rates are near zero, the Zero Hedge analysts say.
“At this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of (SEC Chairman) Mary Schapiro.”
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