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SEC adopts new rule set for money market funds; increases investor protection

By Dobin & Jenks

The U.S. Securities and Exchange Commission (SEC) is taking proactive measures to increase investor protection through strengthening regulatory requirements. This rule new change is expected to significantly increase the governing structure of money market funds, thus adding substantial protection to investors. The newly adopted rules will become effective 60 days after their publication in the Federal Register.

A full-scale review of the regulatory regime of money market funds by the SEC was precipitated by large-scale factors, including the ongoing financial crisis. The SEC?s review was also triggered by the Reserve Primary Fund?s so-called ?breaking the buck? weakness, which causes a money market fund?s net asset value to fall below $1.00 per share. When this happens, investors lose money.

According to the SEC, the new rules are designed to increase the resilience of money market funds to stresses (such as economic pressure), and lessen the risks of runs on the funds. The agency hopes to achieve these ends by tightening the maturity and credit standards of quality as well as implementing new requirements for liquidity.

According to SEC Chairman Mary L. Schapiro,

"These new rules will have substantial benefits for investors and are an important first step in our efforts to strengthen the money market regime. These rules will help reduce risks associated with money market funds, so that investor assets are better protected and money market funds can better withstand market crises.?

The SEC expects the new rules to decrease the risks associated with money market funds by:

? Improving liquidity
? Placing limits on lower quality securities
? Shortening maturity limits
? Using ?Know Your Investor? procedures
? Performing periodic stress tests
? Using Nationally Recognized Statistical Rating Organizations (NRSROs)
? Strengthening repurchase agreements

For more information about this reform and other important investor information, visit the SEC?s Web site at: http://www.sec.gov

Full post as published by The Law Planet Blog on January 29, 2010 (boomark / email).