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Preparing for Funds that Float

Government relief on some issues related to a variable net asset value on money funds and the prospect of a compelling yield may convince some corporate investors to stay put.

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Mutual fund giant Fidelity signaled a change in the money-market fund landscape with its January announcement that it plans to convert some of its prime money funds into government funds.

The conversion of the prime funds—those that invest in corporate securities—seems to anticipate a mass move by investors out of prime funds in response to new Securities and Exchange Commission (SEC) regulations. Those rules will require institutional prime funds to adopt a floating net asset value (NAV), instead of the stable, $1-a-share NAV investors are accustomed to, and will allow funds to use redemption fees and gates to discourage withdrawals in times of market stress.

The changes are expected to discourage many corporate treasurers from investing in prime funds. But proposals by the federal government that would alleviate some problems related to the rules changes, and the prospect of higher yields on prime funds, could help reconcile treasurers to using prime funds in their altered form, some observers say.

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