| BOSTON, July 23
BOSTON, July 23 New rules announced on Wednesday
will likely drive safety-oriented retail investors away from
some money market funds because they highlight risks and make it
harder to pull cash out when market turmoil strikes.
The U.S. Securities and Exchange Commission's reform will
force institutional "prime" money market funds to float their
share price, a major change from the current convention that
allows them to maintain a stable $1 per share net asset value.
The new rules also would allow money funds to impose fees and
restrictions on withdrawals during times of extreme market
"Why would anyone stay in these money funds once they're
floating, rather than just go to a government or treasury fund
that's not floating at all?" said Diahann Lassus, president of
Lassus Wherley & Associates, a New Jersey financial adviser.
Institutional prime money funds attract mostly professional
investors and are considered more risky because of their
exposure to short-term corporate debt. Investment advisers say
money could flow away from these funds and into funds composed
of safer government securities.
Bank-insured sweep accounts will be a clear alternative for
the safety-first crowd, while short-duration bond funds appeal
to investors hunting for higher yields, financial advisers said.
Money funds already have lost some luster during an extended
period of near-zero interest rates. Investors typically receive
yields of 0.01 percent on their money, a losing proposition if
you factor in inflation.
Money fund providers have waived some $24 billion in fees
over the past five years to give customers that yield.
Marie Chandoha, President and CEO of Charles Schwab
Investment Management, a top money fund provider that oversees
$158.2 billion in those investments, downplayed the new SEC rule
imposing barriers or penalties on withdrawals.
"It's an extreme scenario where this would even be
considered," Chandoha said.
Mike Vogelzang, who is president of Boston Advisors LLC, an
investment management company with about $2.8 billion in assets
under management, said some of his clients might push back
against the rules. And if they do, he will suggest they use a
bank-insured account for cash, he said.
"Most of this is going to be about education and having them
understand that a dollar is not a dollar any more in these money
market funds," Vogelzang said.
Annapolis, Maryland-based financial adviser Martin Hopkins,
said the new rules will help investors understand they can lose
"Most clients see these as just like cash, and they are
not," Hopkins said in an email.
Short duration bond fund assets, among the vehicles advisers
think will benefit from a possible exit from MMFs, have already
surged in recent years because of relatively high yields.
At the end of June, short duration bond fund assets totaled
$319.4 billion, up 172 percent from $117.6 billion at the end of
March 2009, at about the same time the stock market hit rock
(Reporting By Tim McLaughlin; Additional reporting by Sarah
Lynch in Washington D.C.; Editing by Richard Valdmanis. Editing
by Andre Grenon)