Money Market Funds Set to Receive New Commissions
If you have invested in a money market fund, you should pay attention to some of the new rules that the Commission on the Securities and Exchange Commission (SEC) will set this week. In particular, the rules allow some of these funds to charge their shareholders a commission of up to 2% on withdrawals.
A money market fund is a type of mutual fund with such a low return that it is considered a cash equivalent investment. You may even be invested in one of them without even realizing it. For example, when I opened my IRA, my money was invested in a money market fund by default. I had to research and buy other investments in order to optimize my portfolio .
On October 14, the Securities and Exchange Commission is introducing some new rules for these types of funds. Among other things, they will allow the fund’s board of directors to impose an additional “liquidity fee” if you withdraw your money from the fund under certain conditions (in particular, when everyone else withdraws funds, usually during financial stress). CBS News reports that this dates back to the 2008 financial crisis:
It’s not that money market fund managers are greedy. This is the result of a massive divestiture of funds by shareholders who immediately needed large amounts of cash as the financial crisis got out of hand. This quick withdrawal amid falling asset values resulted in several money market funds losing money, meaning they “ broke the dollar, ” sending new waves of turmoil to the markets. As of Friday, money market funds will be allowed to charge shareholders a commission of up to 2 percent if the fund’s average weekly liquid assets fall below 30 percent of total assets.
Basically, the idea is to slow down withdrawals when the fund loses liquidity so that it doesn’t actually lose money. Many investment companies, such as Vanguard , have already made some changes to prepare for the reform.
The new rules do not apply to government funds, and CBS News actually recommends transferring your money to a government fund if you have a money market fund. We’ve also given you a few other tips on where to leave your money, depending on your goal. Keep in mind – the rules apply to money market funds , not money market accounts , which are a completely different matter (accounts are FDIC insured bank accounts, not investments).
If you have a money market fund, you at least want to be aware of the changes and you can read the SEC rules at the link below.
Rules Provide for Structural and Operational Reform to Eliminate Risks Associated with Launching Money Market Funds | SEC via CBS News
Photo by TaxCredits.net .