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Not all money funds would be affected by proposed rules, if passed SEC must vote on final rules after comment period Only two money funds have broken $1 share price

The Securities and Exchange Commission will vote Wednesday on whether to propose new rules for money funds – including the possibility of forcing some funds to abandon the constant $1 share price.

The SEC’s proposal, rumored to be more than 500 pages long, would be put out for public comment, a period that typically lasts 60 days, but could be longer. Final rules would be enacted later by a separate vote.

Among the possible proposals would be for some money funds to have variable share prices, just as other mutual funds do. The proposal would affect only funds that invest in commercial debt and are marketed to institutional buyers – so-called prime institutional funds. Other proposals that have been floated would require funds to keep reserves in case of runs.

The SEC has pushed for the new rules governing money funds because of their potential role in another financial meltdown. When the Reserve Fund collapsed in September 2008, it prompted a widespread fear of a run on money funds, which many investors use as their safe harbor.

Money funds invest in short-term IOUs, including commercial paper, which many companies use to finance short-term cash flow. When short-term loans to Bear Sterns and Lehman Bros. evaporated, those companies crumpled. Regulators worried that a run on money funds could lead to paralysis in the short-term credit market, raising fears of a cascade of bankruptcies.

The Treasury took the extraordinary step of guaranteeing all money funds for a year after the Reserve Fund’s collapse.

The fund industry has been opposed to floating share prices for money funds, arguing that reforms instituted in the wake of the financial collapse were adequate to avoid another meltdown. Those reforms included shortening the maturity of the securities that money funds can buy. A variable net asset value (share price) would seriously injure the funds so affected, says J. Christopher Donahue, CEO of Federated Investors.

The key thing that we repeat and repeat, is that these products are as much a cash-management service as investment product, Donahue says. The fact that money funds have $2.5 trillion in assets with no yield is a testament to how investors use the funds, he says.

Only two money funds have actually had their share prices fall below $1. Reserve Fund, ironically, was one of the first money funds created. A small, institutional fund in Colorado broke the buck in 1994, with few repercussions. However, many fund sponsors have had to buy back bad money fund investments from their funds, essentially, bailing them out.

The SEC commissioners meet at 10 a.m. ET Wednesday. It may be 24 hours before the actual proposal is published. You can find comments on the SEC’s previous round table on money funds at www.sec.gov.