The financial crisis of 2008 seems like a distant memory but regulations are still being implemented to combat the recurrence of some of the problems that arose during that challenging time.
In October 2016, rules imposed by the Securities & Exchange Commission (the SEC) concerning money market funds will take effect. If you recall, during 2008-2009, there were liquidity concerns surrounding money market funds and their "breaking the buck." Money market funds have historically been maintained at a constant $1 per share NAV (net asset value) and there was immediate liquidity at that price. However, during the crisis, as the investments beneath the money market funds suffered, the ability to retain the $1 NAV and provide liquidity was in jeopardy. One fund (the Reserve Primary Fund) did in fact break the buck (with its NAV falling below $1), causing severe turmoil and leading to the Treasury creating a temporary guarantee for these funds. Ever since that time, regulations have been phased in as a way to protect against future crisis situations.
The first round of reforms addressed the underlying holdings, credit quality requirements, and transparency of the funds. However, none of these regulations addressed the highly volatile behavior exhibited by institutional investors regarding money market funds during the crisis (as they withdrew an incredible amount of funds - unlike retail investors where contributions offset withdrawals for the most part).
If you are a retail investor with a money market fund in your IRAs or brokerage account, your money market funds will continue to carry a constant NAV of $1 (based upon amortized cost) However, institutional investor money market funds (which could include an LLC account as well as your employer plan (ie: 401k, 403b)) will now be priced based upon a floating NAV, with assets being priced at market value.
Further (and perhaps most importantly), money market funds now have the ability to implement liquidity fees on redemptions (up to 2%) and gates (ie: prevent redemptions) in times of market stress. This applies to retail and institutional investors alike.
Another key item to note - government money funds are exempt from the new rules, including the floating NAV, redemption gates, and redemption fees (again, for both retail and institutional investors)
So, what's the bottom line? If you are a retail investor with money market funds at a main brokerage firm, it's business as usual. These firms have large amounts of liquidity and do not anticipate having to implement the gates or fees. However, if you have money market funds within an institutional account/employer plan, it's worth asking some questions and seeing what other investment options are available to you. And as always, contact us with any questions.