Fixed Income

New Rules for Money Market Mutual Funds

December 12, 2016
Money funds generally will remain low-risk, highly liquid places to keep cash for the short term.

Key Points

  • Individual investors in money market mutual funds saw some federal rule changes governing their funds as of the middle of October of this year.
  • This change was prompted by the money market stresses following the Lehman Brothers bankruptcy filing in 2008 that caused at least one non-T. Rowe Price money market fund’s net asset value (NAV) to go below $1.00 per share.
  • The SEC rules divide money funds into two camps–government and nongovernment funds.
  • Overall, the new rules should have little or no everyday impact on many investors.

New rules

Individual investors in money market mutual funds saw some federal rule changes governing their funds as of the middle of October of this year.

The Securities and Exchange Commission (SEC) rules divide money funds into two camps—government and nongovernment funds. The changes are most significant for nongovernment money funds.

However, overall, the new rules should have little or no everyday impact on many investors. Money funds generally will remain low-risk, highly liquid places to keep cash for short-term needs, and those for individual investors will continue to be managed to keep their net asset value (NAV) at $1.00 per share.

Under the new rules, nongovernment money funds are now required to have the ability, under certain extreme circumstances, to put into place liquidity fees and to restrict redemptions to prevent an investor “run” on money funds.

This change was prompted by the money market stresses following the Lehman Brothers bankruptcy filing in 2008 that caused at least one non-T. Rowe Price money market fund’s NAV to go below $1.00 per share.

Liquidity fees and redemption restrictions—also known as “gates”—are intended to minimize the impact of large redemptions on a money market fund’s remaining shareholders and to stop shareholders from redeeming if there is a significant outflow that dramatically impairs the fund’s liquidity. The new rules for fees and gates are as follows:

  • After a money fund’s weekly liquid assets fall below a 30% threshold, the fund’s Board may (but is not required to) assess a liquidity fee of as much as 2% of an investor’s redemption or temporarily suspend redemptions.

  • After a money fund’s weekly liquid assets fall below a 10% threshold, the fund must assess a liquidity fee of 1% of an investor’s redemption—unless the Board determines that it is not in the best interest of the fund. Alternatively, the Board could decide to permanently suspend redemptions and liquidate the money fund.

Government funds

Money fund investors who wish to avoid the possibility of being affected by liquidity fees and redemption restrictions should consider investing in government money funds. Under the new rules, government money funds may, but are not required to, implement liquidity fees or restrict redemptions. T. Rowe Price already has decided that its government money market funds will not do so for individual investors.

T. Rowe Price Money Market Funds

For individual investors

Government Funds

Government Money Fund*

Government Money Portfolio**

U.S. Treasury Money Fund

Nongovernment Funds

Cash Reserves Fund***

Tax-Exempt Money Fund

Summit Municipal Money Market Fund

California Tax-Free Money Fund

Maryland Tax-Free Money Fund

New York Tax-Free Money Fund

*Formerly known as the Prime Reserve Fund.
**Formerly known as the Prime Reserve Portfolio; only available to investors in a variable annuity.
***Formerly known as the Summit Cash Reserves Fund.

Investors in retail money market funds could lose money by investing in these Funds. Although the Funds seek to preserve the value of your investment at $1.00 per share, they cannot guarantee they will do so. The Funds may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in these Funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to the Funds, and you should not expect that the sponsor will provide financial support to the Funds at any time.

Investors in government funds could lose money by investing in these Funds. Although the Funds seek to preserve the value of your investment at $1.00 per share, they cannot guarantee they will do so. An investment in the Funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to the Funds, and you should not expect that the sponsor will provide financial support to the Funds at any time.