The Error-Proof Portfolio: What You Don't Know About Your Cash Could Hurt You
With the SEC scuttling reform, knowledge is power for money market fund investors.
Last Wednesday, SEC head Mary Schapiro scuttled a controversial plan that would have reformed the way money market funds work. Under the reforms, the net asset values of money market funds would "float" to reflect the true value of their underlying securities. Money market providers would also have to place limits on redemptions and set aside capital to help make up for sudden losses in their holdings.
The goal of these changes was to help prevent a recurrence of the run-on-the-bank scenario that plagued a large money market fund, Reserve Primary fund, in the fall of 2008. When that fund broke the buck--that is, the value of its holdings dropped, taking the fund's net asset value below $1--investors pulled money out in droves. To help prevent further runs, the Federal Reserve and Treasury Department installed a temporary backstop for money market fundholders, guaranteeing a $1 NAV, subject to certain limits; that program has since ended.