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SEC rules preserve the integrity of money funds for individuals

July 23, 2014

Majority of Vanguard investors will not be affected

The Securities and Exchange Commission (SEC) recently approved rules that will allow money market funds catering to individual investors to maintain a stable $1 share price. These rules preserve the value and utility money funds provide individuals, although any investment in a money market fund is not guaranteed.

Bill McNabb"We are encouraged that the Commission has agreed upon a solution," said Vanguard Chairman and CEO Bill McNabb. "With these changes, and the significant safeguards it adopted in 2010, the SEC has issued a strong response to those who believe institutional money market funds pose systemic risk."

The vast majority of investors in Vanguard money market funds will not be affected by the new rules. Rather, they will continue to have access to a stable, high-quality cash management tool.

Keeping risk in check

The SEC has adopted a new liquidity fees and redemption gates regime to give fund boards a new tool to directly address runs on a fund. If deemed appropriate by the money market fund’s board of directors, fees and gates could be imposed on funds below certain liquidity levels.

The rules do impose significant changes on institutional money market funds, which were more susceptible to significant redemptions during the 2008 crisis.

Shifting to a floating net asset value (NAV), as the rule requires for institutional funds, will likely change the way institutional investors use money market funds. However, the compliance date for the floating NAV and fees and gates is two years after the date of publication of the release in the Federal Register, giving investors in those funds time to adapt to the new regime.

Business as usual

Vanguard remains confident in the stability of its money market funds, and continues to manage the funds conservatively and with extreme prudence, focusing on the highest-quality short-term money market instruments.

All of the investments in its money funds are closely examined by Vanguard Fixed Income Group's highly skilled and experienced credit analysts. The quality of the underlying issuer is continually assessed through in-depth credit analysis and does not rely on agency ratings alone.

Money funds continue to play an important role for Vanguard clients, providing a high-quality and liquid investment in both stable financial markets and periods of uncertainty. Vanguard has managed money funds for nearly 40 years as an integral part of its product lineup, and currently holds more than $170 billion in both taxable and tax-exempt money market funds.

Money funds continue to offer one of the most conservative investment options available to Vanguard's clients, who use them to manage cash that they hold for many purposes, such as to save for the purchase of a home, to pay for a child's education, and as a low-risk investment option when other markets experience volatility.

 

Notes: 

  • All investing is subject to risk, including the possible loss of the money you invest.
  • An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. 
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