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Issue 43 – December, 2023

Money Market Funds – What the Future Holds and Is My Money Secure?

By Paul S. Viren, CLU®, ChFC®, AEP®

Our heads are still spinning in the wake of the last 20 months and steep rise in the Federal Reserve raising the Federal Reserve Fund Rate, beginning in March 2022. From an historic low rate of 0.25% to the latest increase in July, 2023, now pegged at a 22 year high of 5.5%.

Clients looking for a safe place to save their personal liquid reserves are thrilled, plowing billions into Money Market Funds and CD’s, at a record clip. After ALL these years of dealing with extremely low savings rates near 0.0% interest on our bank and brokerage savings and money market accounts, now clients, and all of us, have options to earn some decent interest on cash. As of November 2, 2023, the weekly inflows into Money Market Funds were $62.18 Billion, with a record total of $5.7 Trillion now invested in Money Market Funds as reported by the Investment Company Institute.

The questions we are fielding from clients and colleagues are, “Is my money guaranteed in a High Yield Money Market Fund?” The answer is no! Safe, yes; really safe, maybe; guaranteed, NO!

Remember, these Money Market Funds are investing in short term treasury, or high-quality corporate notes and bonds that will mature in a few weeks or months in order to secure the highest possible interest rate for the shareholders. You probably are aware that the share price for Money Market Funds is $1.00 per share. There have been times in the past where some Money Market Funds warned investors that the share price would dip below $1.00, which would disrupt the entire idea of having a “Safe” investment if the shareholder received less than what was deposited.

The purpose of this article is to give my professional colleagues an update on recent amendments to the SEC 2a-7 Rule, to make Money Market Funds more “liquid” and to hopefully stave off the risk of “breaking the buck!” The 5-person board, by a 3-2 margin, on July 12, 2023 passed the amendments with changes effective on October 2, 2023. This is the third amendment to the 2a-7 Rule since 2010. These changes typically come when markets are in stress. The last amendment was made in March, 2020 when the pandemic led the feds to drop interest rates like a rock and for a time, there was the fear of negative interest rates being given to bond holders. This was especially troublesome for short term treasury notes where many Money Market Funds invest much of their assets.

The Final SEC Rule, attempts to improve the resiliency funds have against adverse market conditions and to also increase transparency to shareholders by setting fresh guidelines. Here are some highlights:

  • Increasing minimum daily and weekly liquidity requirements.
  • Eliminating current provisions that permit a Money Market Fund to temporarily suspend redemptions, called redemption gates; and removing the regulatory tie between the imposition of fees and a funds liquidity level.
  • Requiring institutional prime and institutional tax-exempt Money Market Funds to impose mandatory liquidity fees under certain circumstances.

Currently, a money market fund is required to keep only 10% of the fund assets in liquid cash like investments, like a bank account, that was easily accessible. What happens in the event there is the need for more liquidity, when requests for redemptions is higher than the available cash in the fund, potentially during a financial crisis? The fund would impose either a “redemption gate” or 2% penalty, or both, meaning the investors funds may not be accessible for an unknown period of time or pay a penalty to get ahead of the line to access their funds.

The new guideline requires Money Market Funds to have at least 25% of their total fund balance in daily liquid assets and at least 50% of their fund value in weekly liquid assets. Interesting to note is that Tax-exempt Money Market Funds are exempt from the daily liquid minimum requirement.

The SEC also included a new requirement whereby Money Market Funds that have daily liquid assets below 12.5% and weekly liquid assets below 25% of their total assets, must notify its board within one business day of the shortfall and what circumstances lead to the shortfall within four business days.

The Commission believes the increased liquidity requirement will provide enough of a buffer in difficult financial times to give Money Market Fund managers and investors more certainty that they can access their savings.
The Effective Date for the new rules will be October 2, 2023, when the publication of the rule was announced in the Federal Register.

Implementation of the Rules will be:

  • Removal of the Redemption Gates immediately.
  • 6 months from the effective date, April, 2024, Money Market Funds will be required to comply with the increased daily and weekly liquidity requirements.
  • 12 months from the effective date, October, 2024, Money Market Funds will have to adopt the new liquidity framework and reporting requirements.

Summary – The new internal liquidity requirements along with the other amendments and should give us more confidence for clients and their “safe” investments. In this new world of higher interest rates, it is refreshing to actually earn some interest on cash reserves and bond investments. For clients seeking income, for retirement or other purposes, we now have the opportunity to earn interest to at least keep pace with inflation and cash flow needs. Portfolio construction has also been amended to include a reasonable amount in Money Market Funds with greater certainty that these funds will fulfill their pledge of having a stable share price while providing reasonable interest earnings.

For more information, or to read the exciting 146-page report, please visit the site and search for document number 2023-15124.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

Per SEC rule 482(b)(5) prospectus language must be in a type size at least as large as, and a style different from (eg. Italicized or bolded) as that used in a major portion of the materials.

Ds are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.

Paul S. Viren, ChFC, CLU, AEP® Owner and president of Viren and Associates, Inc. an independent financial planning firm based in Spokane, Washington for 30 years.

Paul is a graduate of Whitworth University, Spokane, Washington and has received his credentials from the American College as a Chartered Life Underwriter and Chartered Financial Consultant. He is licensed as an Investment Advisory Representative along with securities registrations 7, 66 and 24 held at LPL Financial and life and health insurance. In 2011 he was nominated by his peers in the Spokane Estate Planning Council to be recognized as an Accredited Estate Planner.

He is the past president of the Spokane Estate Planning Council, and National Association of Estate Planners and Councils, is an active member with Spokane Rotary Club 21, and has served on many boards and civic groups in the community.