A government panel says sweeping changes are needed to prevent money market mutual funds from sparking another financial crisis.
A group led by the Treasury Department said Thursday that the funds should face stricter oversight, insure themselves against losses and allow their share prices to change as investments gain or lose value.
The proposed changes are aimed at making money market funds less risky and easier for investors to understand.
Money market funds put clients' cash to work by investing in short-term debt and other safe investments. Returns are typically small, since money funds are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed.
The funds provide crucial financing for businesses, governments and banks. Companies rely on them for short-term loans used to pay employees and vendors and meet other basic needs.
The funds are popular with all types of investors because they are relatively safe investments. Their shares are sold at a fixed value, usually one dollar. Investors earn interest on the shares.
The perception that money market funds can't lose makes them vulnerable to panics similar to bank runs. Investors are likely to flee if a fund's value falls below one dollar per share — an event known as "breaking the buck."
That's what happened to the Reserve Primary Fund in September 2008. The fund "broke the buck" after it lost money on investments in the investment bank Lehman Bros., which had filed for bankruptcy protection.
The events helped spark the financial crisis. As investors rushed out of money funds, the federal government stepped in with a temporary guarantee program that has since expired. The Securities and Exchange Commission later issued new rules to make money funds safer.
The changes proposed Thursday would go even further. If adopted, they would transform how the funds are regulated and change the practice of setting a fixed value for shares.
Among the proposals:
• When major investors cash out, the funds should be allowed to repay them in stocks and bonds rather than in cash.
• The funds should have some form of insurance. It could be public, like the fund that insures bank deposits. Private insurance also is an option.
• Funds designed to carry investments from individuals should be regulated like banks. Their share prices could remain fixed.
• Funds that invest on behalf of pension funds and other large investors should let their prices change from day to day. The goal is to help investors understand that the funds do carry some risk.
The report was issued by the President's Working Group on Financial Markets. The group is led by Treasury and includes federal banking and market regulators.
The proposed changes will be taken up by a new council charged with monitoring risks to the broader financial system. The body has many of the same members as the working group. It was created by the financial overhaul law that passed this summer.
The Securities and Exchange Commission will collect data and public comments. That information will inform the council's next steps.