The Securities and Exchange Commission recently adopted reforms designed to significantly strengthen the regulatory framework governing money market funds and protect investors. The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about money market funds, including money market funds’ investment objectives and risks. For additional assistance, investors can call the SEC’s Office of Investor Education and Advocacy at 1-800-SEC-0330, or ask a question using this online form.
Money market funds, sometimes called money funds, are a type of mutual fund that invests in high quality, short-term debt securities, pays dividends that generally reflect short-term interest rates, and seeks to maintain a stable net asset value (NAV) per share (typically $1.00). Many investors use money market funds to store cash or as an alternative to investing in the stock market. Money market funds are different from money market depository accounts offered by banks and should not be confused with them. Money market depository accounts are guaranteed by the FDIC and therefore the principal in that deposit account is fully protected up to the dollar limits established by law. An investment in a money market fund, however, has no FDIC guarantee.
Money market funds attempt to keep their NAV at a constant $1.00 per share while the yield changes over time, which generally reflects changes in short-term interest rates. If a money market fund’s NAV falls below $1.00 (as one money market fund did in 2008 due to losses in the underlying investments), it is known as “breaking the buck,” and investors in the fund will lose money. Also, if short-term interest rates are very low, it is possible that fees charged will exceed the income earned on fund investments, in which case the fund will have losses. As with any investment, you should consider the impact of fees on your investment.
In February 2010, the Commission adopted new rules to significantly strengthen the regulatory requirements that protect money market fund investors. The rules are designed to make money market funds more resilient to severe economic stresses, such as those seen in the fall of 2008, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share. The new rules implement reform in the following principal areas:
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.