UPDATE 3-U.S. SEC bolsters money market fund rules

* Funds must hold min. 10 pct in highly liquid assets

* Funds must disclose NAV on a 60-day lag time

* Portfolio rules effective as early as May

* SEC looking at more money market fund reforms
(Adds industry reaction, impact on yields)

By Rachelle Younglai

WASHINGTON, Jan 27 (BestGrowthStock) – U.S. securities regulators
adopted rules aimed at making money market funds a safer
investment after the collapse of the Reserve Primary Fund
triggered a run on the $3.24 trillion market in 2008.

The Securities and Exchange Commission voted 4-1 on
Wednesday to bolster the funds’ liquidity, limit their riskier
investments and to show investors the funds may not always
maintain a stable $1 share value.

The fund industry was pleased the new rules were less
restrictive than the agency initially proposed last year, but
the new rules were likely to come at the expense of some
yield.

Money market funds were considered as safe as cash until
the collapse of Lehman Brothers pushed the value of the Reserve
Fund money market fund below $1 a share and forced the federal
government to create a program to backstop the market.

“One of the key lessons of the financial crisis is the need
for strong liquidity buffers in money market funds,” said SEC
Chairman Mary Schapiro, adding the new liquidity rules would
help ensure investors are able to get their money out of a
fund.

Under the new rules, net asset value — or value of each
share of a money fund — would be disclosed on a 60-day lag
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 market value of a fund’s
assets are a few tenths of a cent above or below a dollar.

The enhanced disclosures would let investors see which
funds are taking risks and potentially push fund managers to
take fewer risks that might cause wide variations to the true
net asset value.

The SEC is also requiring money market funds to hold a
minimum of 10 percent of their assets in liquid securities and
shortening the average maturity of debt the funds can hold to
60 days from 90 days.

Under the new rules, funds would only be allowed to invest
a maximum of 3 percent in second-tier securities, such as
commercial paper that is rated at the second-highest level.
Previously the limit was 5 percent. The portfolio rules go into
effect as early as May.

Last year the SEC had proposed completely prohibiting funds
from investing in second-tier securities.

“It’s positive across the board,” said Deborah Cunningham,
executive vice president at Federated Investors Inc (FII.N: ),
the third-largest money market manager. The SEC “re-thought
some of their proposals and have compromised to some degree.”

Still, the new rules were likely to hurt fund returns.

Fidelity Investments, the largest money market manager, has
estimated that shortening average maturities to 60 days from 90
days would reduce yields on a typical retail fund by as much as
one-tenth of one percentage point.

JPMorgan Chase (JPM.N: ) is the No. 2 manager of such funds.

SEC MULLS FURTHER REFORMS

Commissioner Kathleen Casey was the sole dissenter, arguing
the new rules did not go far enough in some cases and went in
the wrong direction in others. Casey was opposed to one of the
rules that relied on credit ratings and said it “further
embeds” the use of credit rating agencies.

The Republican commissioner has advocated removing a
requirement that money market funds hold securities that are
highly rated. But that has met stiff opposition from the mutual
fund industry and other commissioners, who say the rating
requirement acts as a floor.

The SEC is examining other money market reforms, including
a floating NAV, which would reflect actual assets held. A
floating NAV could drive investors out of the funds and into
other financial products.

The SEC is also looking at real time disclosure of the net
asset value, a private facility to provide liquidity to money
market funds in times of stress and a two-tiered system for
more conservative money market funds which would have stringent
limits on risk-taking and a backstop requirement.

Stock Investing

(Reporting by Rachelle Younglai; Additional reporting by Aaron
Pressman in Boston; Editing by Tim Dobbyn and Andre Grenon)

UPDATE 3-U.S. SEC bolsters money market fund rules