Mary Jo White, chairwoman of the Securities and Exchange Commission.Credit Eduardo Munoz/Reuters Related Links Regulators on Wednesday imposed new restrictions on a vast market that played a major part in the 2008 financial crisis.
By a 3-to-2 vote, the Securities and Exchange Commission adopted a set of new rules for money market funds, a $2.6 trillion industry where ordinary individuals and sophisticated institutions alike park their cash. The rules come after years of debating among regulators and lobbying from Wall Street.
The new rules "will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system," Mary Jo White, the S.E.C. chairwoman, said in a statement. "Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America's investors."
The split on the commission reflected the lingering frustrations still felt by many in the debate over money market funds. These funds, major lenders to financial institutions, are deeply embedded in the financial system.
This fact was vividly on display in the financial crisis, when after the collapse of Lehman Brothers, one fund, the Reserve Primary Fund, startled investors by reporting a net asset value below $1 a share. As investors dumped their shares, panic spread throughout the financial system and worsened the gathering crisis. Regulators vowed to find a solution.
The rules approved on Wednesday aim to prevent any future runs through a combination of measures. In one important change, certain money market funds will have to report a floating net asset value, instead of a fixed value of $1 a share. This change is meant to remind investors that the funds are not without risk and their value can periodically decline.
But not all funds will be covered by that rule. Only funds whose investors are institutions, and which buy corporate debt or municipal securities, are covered. Funds whose investors are individuals are not subject to the change.
In addition, the S.E.C. adopted rules that give funds the ability to stem investor redemptions during times of stress. Money market funds, in these situations, will be able to impose fees or "gates" that would prevent investors from taking out their cash.
This feature drew criticism from Kara M. Stein, one of the S.E.C.'s commissioners, who argued that the gates would create a situation where sophisticated investors try to anticipate them. This, she said, could give investors "a strong incentive to rush to redeem ahead of others," creating a run on the fund and potentially on other funds as well.
Still, given the contentious history, getting the rules passed was itself a remarkable accomplishment, said Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation who is now chairwoman of the Systemic Risk Council, a private sector group that has pressed for more stringent financial regulation.
"There was so much political heat and scrutiny," Ms. Bair said. Referring to Ms. White, the chief of the S.E.C., she added: "Just the fact that she got a final rule is something that was tremendous."
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