As the second largest bank in the United States, Bank of America plans to simplify their investment options as increased regulation looms on the horizon–– and other investment groups seem to be planning on doing the same. After the financial hardships of 2008, The Security Exchange Commission (SEC) passed new regulations aimed at reducing risks for money market funds. These new regulations are set to go into action in October of this year, and will dramatically change investing practices.
Why is this happening?
In many cases, money market accounts can be extremely volatile. During the financial crisis of 2008, failed money market funds left shareholders in treacherous waters, which led to the subsequent invocation of increased regulation from the government.
In a notable case, one fund in particular had share value drop below one dollar. The Reserve Fund had to liquidate all assets after a run on the fundfrom worried shareholders. The fund held $64.8 billion in assets, and of those assets, $785 million were allocated to short-term loans issued by Lehman Brothers.
These “commercial paper” loans became worthless when Lehman Brothers filed bankruptcy.
Although the commercial paper made up only 1.5 percent of the total money market fund, fear among shareholders grew as the news broke about the Lehman Brothers collapse. Within 24 hours, two-thirds of investors pulled their money out of the Reserve Fund. As tumult struck, the net asset value (NAV) fell below $1 per share to 97 cents—marking one of the first times in history the NAV of any money market fund fell that low.