On June 24, the Securities and Exchange Commission unanimously approved a rule proposal that seeks to tighten the regulation of money market funds. The proposal is in direct response to the aftermath of The Reserve Primary Fund announcement that its per share net asset value fell below $1.00 (“breaking the buck”) in September 2008 and the subsequent temporary financial guarantees offered to money market funds by the U.S. Treasury Department to stabilize the financial markets. The SEC’s proposal seeks “to strengthen the regulatory framework for money market funds to increase their resilience to economic stresses and reduce the risks of runs on the funds.” Among other things, the SEC proposes to require money market funds to maintain a portion of their portfolios in highly liquid investments, reduce their exposure to long-term debt, and limit their investments to only the highest quality portfolio securities. In addition, the proposal would require the monthly reporting of portfolio holdings, and allow the suspension of redemptions if a fund “breaks the buck” to allow for the orderly liquidation of fund assets. The SEC is also seeking comment on other issues related to the regulation of money market funds, including whether money market funds should have “floating” rather than stabilized net asset values, whether funds should satisfy redemption requests in excess of a certain size through in-kind redemptions and whether there are alternatives to using credit rating agency ratings in money market fund regulation.

The rule proposal has not been published yet. Click here to read the press release announcing the SEC’s action.