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The SEC Votes in Favor of Overhauling the Money Market – Mutual Fund Industry

“The Securities and Exchange Commission voted in favor of overhauling the $2.6 trillion money-market mutual fund industry, targeting the types of funds seen as most prone to investor runs during the financial crisis.

The SEC’s proposal would require “prime” funds catering to large institutional investors to abandon their fixed $1 share price, allowing the funds’ prices to float like other mutual funds, according to a fact sheet distributed ahead of the vote. Prime funds invest in short-term corporate debt; less-risky funds buy only government securities.

The SEC’s five commissioners supported the proposal unanimously.

Resolving long-standing concerns about money funds is a priority for Mary Jo White, the SEC’s new chairman, who is under pressure from U.S. and global regulators to address risks in the cash-like investments. An overhaul proposal favored by former SEC Chairman Mary Schapiro faltered last year.

In targeting prime institutional funds, the SEC believes it is targeting the part of the industry most likely to lead to trouble. Institutional investors’ concerns about prime funds’ exposure to Lehman Brothers debt caused them to withdraw about $300 billion from the funds in the week after the firm collapsed in September 2008.

Supporters say switching to a floating share price would make prime funds less susceptible to runs because investors would know the current share price and wouldn’t race to sell in anticipation that it could fall below $1, as happened during the crisis.

The industry is divided on the issue, however, with many firms warning a floating share price will turn off investors. Some former regulators who back additional rules worry the SEC’s proposal may leave retail investors unprotected. Retail funds would be allowed to maintain a stable share price.

Under Wednesday’s proposal, funds also would have to release immediately the detailed information about their portfolio holdings that they provide to the SEC each month. Currently, such data is subject to a 60-day delay before it is made public….”

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