SEC considers tougher rules for money funds

WASHINGTON – Investors could lose principal from money market investment funds that perform poorly under regulations proposed Wednesday by the Securities and Exchange Commission. But the change would affect mainly institutional rather than individual investors.

The SEC voted 5-0 to advance the plan, which would require shares of some money-market funds to “float”, instead of having a fixed value of $1 per share. The proposal failed to gain support last year but has since won the backing of a panel of regulators that include Federal Reserve Chairman Ben Bernanke.

The agency also proposed new fees on withdrawals from funds if their assets that can be readily converted into cash fall below a certain level. Both changes are intended to better inform investors and protect the industry from risks that surfaced at the height of the 2008 financial crisis.

The public has 90 days to comment on the proposals. At some later point, the agency would finalize the rules or settle on a modified version of them.

Requiring values to float would make some money funds more like bonds, whose principal changes with increases or decreases in interest rates. That’s a fundamental shift because it means investors could lose principal if the value falls below $1.

Proponents say it is necessary change because it would show money funds, while safer than stocks and many other investments, still carry some level of risk. They say more awareness of the risk would reduce the potential for runs on money funds.