Treasury's Guarantee Program for Money Market Mutual Funds: What You Should Know
Money market mutual funds play an important role in America's financial markets, offering a relatively lower-risk alternative for investors who seek stability and liquidity. Recent market events put a spotlight on the money market fund industry—including the U.S. Treasury Department's announcements on September 19 and 29, 2008, of a temporary guarantee program for the money market fund industry. In creating the guarantee program, Treasury seeks to address temporary dislocations in the credit markets.
We are issuing this Alert to help investors better understand money market funds and to answer some of the questions investors may have about Treasury's guarantee program.
A money market mutual fund is an investment company that pools money from investors to purchase short-term investments—such as Treasury bills, certificates of deposit, and short-term bonds (known as commercial paper) issued by large corporations—that meet certain standards set forth by the Securities and Exchange Commission for credit quality, liquidity, and diversification. As of July 2008, there are more than 800 money market funds in the United States—roughly 10 percent of all U.S. mutual funds.
The federal securities laws set limits on the types of investments a money market fund can make. Money market funds have traditionally attracted investors seeking to preserve their principal or who need a short-term place to invest their cash. As with any securities investment, investing in money market funds involves risk—and while rare, investor losses are possible. In contrast to bank money market deposit accounts and other bank savings accounts, money market funds are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. However, as explained below, for an initial three-month period, money market funds can participate in a guarantee program offered by Treasury that will insure assets held in money market mutual funds as of September 19, 2008.
Like other mutual funds, a money market fund is required to calculate its net asset value (NAV) at least once a day, typically after the U.S. markets close. A fund's NAV is its price per share, which reflects the total value of the fund's investment holdings. Money market funds invest with the goal of maintaining a stable NAV of $1.00 per share. That means that investors can typically expect to get back one dollar for every dollar they invest in the fund, plus any returns (meaning the interest or dividends the fund earns).
A money market fund is said to "break the buck" when its NAV falls below $1.00 per share. In the nearly 40-year history of money market mutual funds, this has happened on only two occasions—in 1994, when a fund lost approximately four cents on the dollar, and in September 2008, when the NAVs of money market funds issued by The Reserve Fund fell below $1.00.
Typically, there has been an expectation that when a money market fund reaches a point where it might break the buck, the investment management firm that sponsors the fund will take action to infuse the fund with cash so that the fund can maintain a stable NAV of $1.00 per share. Most money market funds in the U.S. are sponsored by large financial institutions that may provide assistance in the case of instability.
On September 19, the U.S. Treasury announced the establishment of a temporary guarantee program to protect shareholders of money market mutual funds—and on September 29, officially opened the program to eligible money market funds. Eligible money market funds include publicly offered funds that are registered with the SEC, are regulated under Rule 2a-7 of the Investment Company Act of 1940, and seek to maintain a stable $1.00 NAV. Both taxable and tax-exempt money market funds may participate. As explained in Treasury's September 29 announcement, eligible funds must apply and pay a fee to participate in the program-the program is not automatic. The program is not available to any fund that broke the buck prior to the close of business on September 19.
The program will insure shareholder assets in participating money market funds as of the close of business on September 19. In other words, if a money market fund that participates in the guarantee program subsequently fails to maintain a stable $1.00 NAV, the program will provide coverage to shareholders up to the amount they owned on the date the program was announced. This action is intended to enhance market confidence and alleviate investors' concerns about the ability of money market funds to absorb a loss.
Investors cannot sign up for the guarantee program on their own. Instead, each money market fund must decide whether to participate in the program—and, if so, must apply by October 8, 2008. You can find out whether a money market fund participates in program by contacting the fund directly or checking their Web sites.
In addition, you should be aware of the following features of the guarantee program:
1. Limits on the Guarantee—The insurance provided by the guarantee program extends only to the total value of a shareholder's account in a participating fund as of the close of business on September 19, 2008. Here are some examples to illustrate how the guarantee program works:
2. Tax Issues—Participation in the program by a tax-exempt money market fund will not jeopardize the tax-exempt status treatment of payments. The Treasury and the IRS have issued guidance confirming this point.
3. Duration—Initially, the program will be in effect for three months, beginning September 19, 2008. After three months, the Secretary of the Treasury will assess the program, including whether to extend it (up to September 18, 2009).
The bottom line is that whatever amounts you held in a participating money market fund as of September 19 will be protected under Treasury's guarantee program for as long as the program remains in effect. For more information, see Treasury's FAQs.
Information for Reserve Fund Shareholders
Because certain of the Reserve money market funds broke the buck prior to September 19, these funds are not eligible for the Treasury guarantee program. On October 30, 2008, the Reserve announced a plan to make an initial distribution to shareholders in the Primary Fund. The Reserve's board of trustees are continuing to work on plans to liquidate certain of its other money market funds. For more information and updates on the liquidation plan, be sure to check Reserve's Web site.
In the meantime, investors who need cash but cannot access their holdings in the affected funds should understand their alternatives. These include awaiting implementation of the Reserve's liquidation and distribution plan, liquidating other investments, or arranging for a loan from their broker (which might require signing a margin agreement). Each of these choices has consequences that investors should carefully consider before acting.
If you have questions, be sure to contact your brokerage firm—or the fund company if you purchased your shares directly. If your firm did not resolve the problem to your satisfaction, you can file a complaint online at FINRA's Investor Complaint Center.
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