New Regulations

• The Securities and Exchange Commission passed new rules governing money market funds following the 2008 financial crisis. The new rules officially became law on Dec. 31, 2010. The guidelines require funds to invest in low-risk securities. Money market funds are not insured, so there is always a slight risk investors can lose money, including the principal invested. The new rules establish guidelines on the types of investments funds can purchase and places limits on bond maturities. Funds can invest in government securities, certificates of deposit, corporate commercial paper and other highly liquid, low-risk securities. The rules are an effort to reassure investors their money is not only safe but available when needed. The SEC hopes to prevent future runs on the funds of the type that caused problems during the financial crisis.
  
  

Breaking the Buck

• The bankruptcy of a couple of major financial institutions in 2008 caused some money market mutual funds to "break the buck." When the institutions declared bankruptcy, their securities became virtually worthless. The funds holding these instruments lost money. A money market fund "breaks the buck" when the value of a share drops below $1. The net asset value, NAV, of money market funds is supposed to always be $1. The new SEC rules are an effort to maintain a $1 per share value for all money market funds.
  
  

Money Market Securities

• The new rules require at least 30 percent of fund assets be in cash, U.S. Treasury securities or other government securities that mature in 60 days or less. A portion of fund assets must be easily convertible to cash within one week's notice. Only 5 percent of assets can be allotted to illiquid securities not easily moved to cash. Only 3 percent of assets are permitted to be invested in second-tier assets, which are lower than the highest grade investment rated securities. All securities must mature within 90 days. The funds are required to post fund holdings on their website every month.
  
  

Types of Funds

• Financial institutions offer a number of money market funds that invest in various kinds of securities. Some money market funds invest only in U.S. Treasury instruments. Some specialize in municipal securities. Other funds invest in government agency notes and commercial paper. A fund's yield is quoted as the most recent seven-day yield annualized. All funds offer a monthly dividend.