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SEC seeks public comment on plans to strengthen the nearly $3 trillion industry One proposal would let funds net asset values float Second alternative would impose fees and gates to slow crisis-triggered redemptions

The Securities and Exchange Commission unanimously approved stricter regulations for the nation’s nearly $3 trillion money-market mutual fund industry Wednesday, moving to strengthen a popular investment sector that posed major risks during the 2008 financial crisis.

If adopted after a 90-day public comment period, investors could theoretically lose principal from their investments in money market investment funds that suffer market losses. But that risk would largely affect institutional rather than mom-and-pop investors.

In a 5-0 vote, SEC commissioners adopted two proposals that could either be enacted individually or combined in a hybrid oversight package after investors comment.

One would allow the net asset value of some money-market funds to float instead of having a fixed value of $1 a share. That would make the funds function more like bonds and would mean investors could lose some of their investment if the fund value dropped below $1 a share.

The floating-value proposal would apply to so-called prime funds, which attract large institutional investors and are more risky because they invest in short-term corporate debt. Retail funds that limit investor withdrawals to $1 million per business day would be exempt. So would funds that have at least 80% of their assets in cash or government securities.

The second proposal would set a new 2% fee for investor withdrawals from funds whose liquid assets fall to less than the required amount. Directors of such funds would also be able to impose a temporary gate that blocks investor redemptions for up to 30 days in any 90-day period.

Both proposals are aimed at informing investors of money-market-fund risks and avoiding the market risk that occurred after the collapse of Lehman Bros. in 2008, when Reserve’s flagship Primary fund and two offshore funds broke the buck — fell below the $1-per-share value. Startled by the news, investors withdrew nearly $300 billion from other prime money-market funds within the next week.

The investor run stopped only when the Federal Reserve and Treasury Department intervened with temporary guarantees of money-market-fund values.

While money-market funds have thus long served as an important investment vehicle, the financial crisis of 2008 highlighted the susceptibility of these products to runs, SEC Chair Mary Jo White said before the vote.

Other commissioners praised the flexibility offered by the companion package of proposals. However, Commissioner Troy Paredes voiced opposition to enacting the floating-value proposal as a sole regulation. He said it would not stop investor runs and would impose unnecessary costs on funds and investors.

Money-market-fund industry representatives and others offered mixed reactions in the initial hours after the SEC action.

This is much more reasonable than anyone expected, said Peter Crane, publisher of Crane Data, which tracks the money fund industry. There will be strong support for sales charges and gating.

Sheila Bair, former chair of the Federal Deposit Insurance Corp. said she tentatively disagreed with the floating-value proposal’s distinction among different types of money-market funds. She also said the fees and gates in the companion proposal could block or disrupt access to funds while creating incentives for sophisticated investors to withdraw before the gates clang shut.

A better, simpler, market-based solution would be to require that all money-market funds operate like other mutual funds — with prices that float to fully reflect the value of their underlying assets, said Bair, who now chairs the Systemic Risk Council, a non-partisan organization that monitors financial reforms.

Vanguard, the world’s largest mutual fund company, said it appreciated SEC efforts in advancing this debate and welcomed the opportunity to submit detailed comments.

Jack Murphy, a partner at global law firm Dechert, said the proposal to impose liquidity fees and withdrawal gates was similar to suggestions that have been put forward by many in the industry.

As recognized by several of the commissioners in their remarks, liquidity fees would discourage large-scale redemptions, while gating could effectively stop a run in its tracks, said Murphy.