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SEC votes to improve money market liquidity, disclosures Print E-mail
Thursday, 28 January 2010

By Matthew Quinn

The Securities and Exchange Commission voted 4-1 on Wednesday to improve money market funds' liquidity, as well as limit their investment risks and require them to provide more disclosures, Reuters reported.

The usually sleepy money market industry was thrown into turmoil by the collapse of Lehman Brothers, which caused the $60 billion Reserve Primary Fund to "break the buck," meaning the fund's value fell below $1 a share.

Coincidentally, Reserve Management said Tuesday night that it will make its last distribution to Primary Fund shareholders, the Associated Press reported. Once the $3.4 billion payout is made, Reserve Management said 99 percent of what the fund held at the peak of the financial crisis will have been returned. The fund will retain roughly $160 million to cover legal and management costs.

Under the new SEC rules, net asset value of each share of a money fund would be disclosed on a 60-day lag basis, Reuters said. Shares are typically offered at a dollar, even if their market value is a few tenths of a cent above or below a dollar.

The intention of the enhanced disclosures is to give investors an idea of the risks a fund manager is taking, which in turn may cause the manager to reduce that risk taking.

The new rules would also require funds to hold a minimum of 10 percent of their assets in liquid securities and to shorten the average maturity of the debt they hold to 60 days from 90 days. Additionally, the new rules allow funds to hold a maximum of 3 percent in second-tier securities such as commercial paper, down from the previous limit of 5 percent. The Reserve fund held $785 million in Lehman CP, which it had to mark down to zero when Lehman filed for bankruptcy.

The portfolio rules go into effect as early as May.

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