Money market reform changes investing landscape

New SEC rules provide investors with more awareness and options

Money market mutual fund reform laws will be taking effect in October. By understanding the new laws, their impacts and how to leverage the changes – there is incredible opportunity for investors as well as for community and commercial banks. 

During the 2008 economic downturn, several regulatory changes were put into place to enhance the stability of all money market mutual funds. The goal of these new rules was to tighten restrictions on portfolio holdings, allow for greater transparency and enhanced liquidity and also to ensure credit quality requirements were met.  While these new rules were well-received, they did not correct the core issue of resolving the volatility of these funds. Therefore, in 2014 the Security Exchange Commission (SEC) reevaluated the requirements for money market mutual funds and approved a new set of rules that will go into effect on October 14, 2016. 

As part of these newly amended rules, the categories for money markets have been changed to include: government, retail, and institutional funds. While government and retail funds will maintain the stable $1.00 per share price, institutional funds will have a floating net asset value (NAV) like other mutual funds. 

The upside with the new rules is that some money market mutual funds will be required to report more accurate prices – providing greater awareness for investors.  Also, by having floating values, it will be clear to investors that these funds can fluctuate and should be used as a means to invest and not a source of guaranteed income. 

However, there is also a downside, as part of this reform, the SEC put rules in place to set redemption limits. These limits, called “gates,” will temporarily lock investors into their fund, preventing them from selling. While not necessarily causing panic, it does make investors think twice before investing in money markets. 

All of these changes have caused non-bank financial institutions to carefully consider whether or not they want to offer money market mutual funds because these changes make it less attractive for larger non-bank institutions to offer these products. It is simply too risky for them. 

As the large non-bank financial institutions shy away from offering mutual funds, it opens up the doors for banks to capitalize on the unmet needs of investors who may no longer be able to purchase institutional money market mutual funds. By offering money market deposit accounts, which typically have equal or better returns than money market mutual funds, banks can provide customers with a winning situation – money market accounts allowing for all the benefits with none of the risk.

In addition, most banks offer protection through the Federal Deposit Insurance Corp., which insures deposits up to $250,000. And others (including The Provident Bank) also provide insurance through the Depositors Insurance Fund, a private, industry-sponsored fund that protects all deposits above FDIC limits at Massachusetts-chartered savings banks. This differentiation presents investors with an even greater amount of security. 

Dave Mansfield is the CEO of  The Provident Bank. He previously worked as a bank examiner for both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporate, and is a Certified Financial Analyst.