January 26, 2010 / 9:32 PM / 10 years ago

UPDATE 2-US SEC mull tough rules for money market funds

* SEC meets Wednesday to consider new money market rules

* Funds may have to hold min 10 pct in highly liquid assets

* SEC mulls cutting debt maturity to 60 days from 90 days

* Funds may have to disclose NAV on a 60-day lag time (Recast first paragraph; adds detail on second-tier securities, bylines)

By Rachelle Younglai and Aaron Pressman

WASHINGTON/BOSTON, Jan 26 (Reuters) - U.S. regulators are preparing new rules to limit the risks taken by money market funds, aiming to ensure investors can always withdraw their money, two people familiar with the plans said on Tuesday.

The Securities and Exchange Commission wants to avoid a repeat of the run on the $3.24 trillion market that occurred during 2008’s collapse of the Reserve Primary Fund.

The agency is considering requiring money market funds to hold a minimum of 10 percent of their assets in liquid securities and may shorten the average maturity of debt the funds can hold to 60 days from 90 days, the sources said.

At a meeting Wednesday, the SEC will also consider requiring funds to publicly disclose the net asset value, or value of each share of a money fund, on a 60-day lag basis.

The sources requested anonymity because the plan is in flux and has not been made public.

Net asset value would be disclosed on a monthly basis and allow investors to follow a fund’s share price.

Under typical industry practices, money market funds offer shares at one dollar, even if the true value of a fund’s assets are a few tenths of a cent above or below that.

Money market funds were considered as safe as cash until the collapse of Lehman Brothers in 2008 pushed the value of the Reserve Fund money market fund below $1 a share and wreaked havoc on the industry. The federal government was required to create a program to backstop the market.

The SEC had proposed different rules for retail money market funds and institutional funds, which experience greater liquidity challenges. Now, the rules would apply to all money market funds, sources said.

The agency is considering limiting funds from investing in so-called second-tier securities, or the second-highest category of rated assets such as commercial paper that companies issue.

Previously, the agency had been considering a ban on such securities, but some have questioned whether this would hurt companies’ abilities to raise capital.

Now the regulator is considering other restrictions such as limiting the amount of these securities to 3 percent of a money market fund’s total portfolio. The regulator is also considering cutting the debt maturity of such a security to 45 days from the current 397 days, sources said.

The agency may consider at a later date other changes that could include a fluctuating net asset value.

Industry has lobbied fiercely against a floating NAV.

“That will kill the institutional business and we think will have a material impact on the retail business,” Rodger Lawson, the president of Fidelity Investments, told Reuters in an interview last week.

The largest managers of money market funds include Fidelity, Federated Investors (FII.N) and JPMorgan Chase (JPM.N). (Reporting by Rachelle Younglai and Aaron Pressman; Additional reporting by Ross Kerber; Editing by Robert MacMillan and Tim Dobbyn)

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