The five commissioners of the Securities and Exchange Commission (“SEC”) unanimously voted in favor of enforcing new rules applicable to prime money market mutual funds in an effort to decrease investor runs during financial crises. Prime money market mutual funds invest in short-term corporate debt and are considered riskier than funds that solely invest in government securities. The SEC’s proposed rule change would require prime money market mutual funds with mostly institutional investors to abandon a fixed $1 share price, and permit the funds to float their prices. The SEC proposal would also cap daily redemptions at $1 million per shareholder. Similarly, as part of the proposal, the SEC is considering allowing prime money market mutual funds to disallow investors from withdrawing their funds during times of stress, or imposing a hefty fine for investors who choose to do so. The SEC is targeting prime money market mutual funds, as those funds are considered most likely to experience investor runs during economic turmoil. For example, in the weeks following the collapse of Lehman Brothers in 2008, institutional investors who were concerned about prime money market mutual fund exposure to Lehman debt withdrew nearly $300 billion from the prime money market mutual funds since they were concerned that the share prices would fall below $1 per share.
Industry experts and participants are divided over the SEC proposal. Proponents, mostly being firms with few institutional investors, believe institutional investors exacerbated the 2008 financial crisis and think that the SEC proposal will eliminate such problems in the future. On the other hand, many investment firms do not support the proposal as they feel it would turn away institutional investors. The proposal is subject to a 90-day comment period. Thereafter, the SEC will review all comments and vote again before the proposal takes effect.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses. Please contact our team of attorneys for a consultation at (212) 696-1999.