An individual with twenty thousand dollars of idle cash wants money market returns. What does a money market fund give this investor that buying money market instruments directly would not?

A share of a diversified pool, without the minimum denominations and handling burden of individual instruments

A higher yield than the underlying instruments pay, because the fund borrows to enlarge its holdings

A fixed maturity date on which the full amount invested is repaid together with all accrued interest

Direct ownership of each instrument, registered in the investor's own name with each issuer

What drove investors into money market funds as the industry grew in the 1970s and 1980s?

Deposit insurance on bank accounts was withdrawn, so savers needed a protected home for their cash

Regulation Q ceilings held bank deposit rates below the yields then available in the money market

Rule 2a-7 first allowed retail investors to buy commercial paper in small denominations directly

Stock exchanges were closed to retail investors, leaving money market funds as the only pooled option

A corporation's treasurer keeps large balances in money market funds. What in the corporation's operations typically gives rise to those balances?

Reserves that it must keep on deposit with the Federal Reserve each business day

Collateral that its lenders require it to post against outstanding bank loans

Timing gaps between when cash comes in and when it must be paid out

Proceeds of share buybacks that must sit in a segregated account until settlement

A money market fund's portfolio shows a weighted average maturity of 45 days and a weighted average life of 150 days, and no holding has more than 300 days left to maturity. Which Rule 2a-7 maturity limit does the portfolio breach?

The weighted average life limit, which the 150-day figure exceeds

The weighted average maturity limit, which the 45-day figure exceeds

The individual security limit, which the 300-day holdings exceed

None of them, as each figure falls within the limits the rule sets

Rule 2a-7 requires money market funds to keep minimum percentages of their portfolios in daily liquid assets and in weekly liquid assets. How quickly must each kind be convertible to cash?

Daily liquid assets within one business day, weekly liquid assets within three business days

Daily liquid assets within one business day, weekly liquid assets within five business days

Daily liquid assets by the same day's close, weekly liquid assets within five business days

Daily liquid assets by the same day's close, weekly liquid assets within three business days

How does amortised cost accounting allow most money market funds to report a stable one-dollar net asset value per share?

Income is kept in a reserve that is drawn down whenever market prices would push the value below one dollar

Holdings are marked to market daily, and the adviser covers any shortfall below one dollar out of its own fees

Holdings are carried at purchase price adjusted for any premium or discount over their remaining life, not at market value

Shares are repriced only weekly, and gains or losses in between are paid out as adjustments to the dividend

A money market fund holds 98 percent of its total assets in Treasury bills and fully collateralised government repurchase agreements and 2 percent in highly rated commercial paper. Why can it not qualify as a government money market fund?

A government fund may hold no instrument rated by an agency, so its rated commercial paper disqualifies it on that ground

A government fund may hold Treasury securities alone, so its repurchase agreements disqualify it whatever their collateral

A government fund must keep at least half of its assets in cash, so its heavy weighting in Treasury bills disqualifies it

A government fund must hold at least 99.5 percent of assets in cash, government securities or fully collateralised government repos

What net asset value treatment may a prime money market fund open only to investors who are natural persons use, and what reasoning lies behind it?

They may keep a stable one-dollar NAV, as natural persons are seen as less prone to rapid mass redemptions

They must float their NAV, as natural persons are seen as less able to judge the credit risk of prime holdings

They may keep a stable NAV, as their portfolios are confined to the Treasury securities held by government funds

They must float their NAV, as natural persons are seen as more likely to redeem all at once in a market crisis

Which investor gains the most from choosing a municipal money market fund rather than a taxable money market fund for a cash reserve?

A low-bracket investor holding the cash reserve inside a tax-deferred individual retirement account

A high-bracket investor holding the cash reserve in an ordinary taxable brokerage account

A high-bracket investor holding the cash reserve inside a tax-deferred individual retirement account

A low-bracket investor holding the cash reserve in an ordinary taxable brokerage account

Which event is described as a money market fund breaking the buck?

Its share price rising above one dollar, so that new investors must pay a premium

Its yield falling below the rate paid on insured bank savings accounts at the time

Its net asset value per share falling below the one dollar it seeks to maintain

Its total net assets falling below the minimum size that its sponsor has guaranteed

After the Reserve Primary Fund broke the buck in 2008, how did the Federal Reserve's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility support money market funds?

It bought the funds' Lehman Brothers paper at face value, so that their net asset values returned to one dollar a share

It bought commercial paper directly from issuers through a special vehicle, so issuers could refinance maturing paper

It lent directly to the funds against their Treasury holdings, so that the funds could keep buying new commercial paper

It financed banks that bought asset-backed paper from the funds, so the funds could meet redemptions without fire sales

In 2008 the Treasury Department temporarily guaranteed money market fund balances. Which balances did that guarantee cover?

Balances existing on the date the guarantee was announced, not money added afterwards

Every balance held at any point while the guarantee remained in force, including new money

Balances up to two hundred and fifty thousand dollars per investor, the bank deposit limit

Balances in prime funds holding Lehman paper, the only funds exposed to the losses that year

Institutional prime money market funds were required to float their net asset value at current market prices. What run dynamic was that requirement designed to remove?

Investors switching into government funds whenever prime yields fell below the rates on Treasury bills

Early redeemers exiting at a full dollar while the shareholders who stayed absorbed the portfolio's losses

Funds selling their most liquid holdings first, leaving the remaining holders with harder-to-sell paper

Advisers waiving their fees to hold the price at a dollar, so that losses stayed hidden from shareholders

The 2014 and 2016 reforms let a prime money market fund's board impose a redemption fee of up to two percent, or suspend redemptions for up to ten business days, when weekly liquid assets fell below set minimums. What were these tools meant to achieve?

Covering the fund's losses on defaulted paper, so that its net asset value could be restored to a dollar

Penalising investors who moved to rival funds, so that the fund's assets under management held steady

Slowing redemptions so the fund could raise cash from maturing holdings rather than through a fire sale

Compensating the fund's adviser for the added trading costs of meeting redemptions in a stressed market

How did the SEC's 2023 amendments to Rule 2a-7 change the liquidity fee and redemption gate framework?

Fees and gates both stayed discretionary, but government funds became subject to both of them for the first time

Fees were abolished as unfair to departing investors, and gates became mandatory for every prime fund under stress

Fees and gates both became mandatory under stress, replacing the board's discretion over whether to use either

A discretionary fee stayed, institutional prime and institutional tax-exempt funds gained a mandatory fee, and gates were removed

Unlike balances in savings accounts at FDIC-insured banks, what protection against loss do money market fund shares carry?

None from the FDIC or any other government agency, despite the stable value convention

FDIC insurance up to the per-depositor limit, provided the fund keeps a stable value

A guarantee from the sponsoring firm, which must cover any fall below one dollar a share

Rule 2a-7 coverage, which requires the fund's adviser to restore any shortfall in value

Short-term interest rates rise steadily over several months. How do money market fund yields typically behave compared with bank deposit rates?

Fund yields rise more slowly, as holdings are locked in until maturity, while banks reprice their deposits at once

Fund yields rise faster, as short holdings mature into higher-yielding instruments, while banks reprice deposits slowly

Fund yields fall, as rising rates cut the market value of their holdings, while bank deposit rates move up

Both rise at the same pace, as fund yields and bank deposit rates are both set by one Federal Reserve benchmark

A client has sold a house and needs the full proceeds in two months to close on a new one, and cannot bear any loss on them meanwhile. Which money market fund category suits the cash, and why?

An institutional prime fund, as its floating value shows the client the cash's true worth daily

A prime fund, accepting more credit risk in exchange for its better yield over the two months

A municipal fund, as its tax-exempt income would add to the proceeds without adding credit risk

A government fund, accepting a lower yield in exchange for greater safety and stability of value

Rule 2a-7 caps each money market fund holding's remaining maturity and the portfolio's weighted average maturity and weighted average life. What do those caps chiefly protect the fund's net asset value against?

Currency risk, as short-dated holdings can be switched into dollars before exchange rates move

Interest rate risk, as holdings that mature soon lose little value when market rates move

Concentration risk, as holdings that mature quickly cannot pile up in any one issuer for long

Prepayment risk, as short-dated paper is repaid on schedule rather than called early by its issuer

Rule 2a-7 requires a money market fund to keep minimum percentages of its portfolio in daily and weekly liquid assets. When some of its other holdings become hard to sell in a stressed market, what do those buffers let the fund do?

Suspend redemptions until the hard-to-sell holdings mature and are repaid at full value

Value the hard-to-sell holdings at their cost, so that the fund's share price holds steady

Meet redemption requests promptly without having to sell the holdings that have become illiquid

Pledge the buffer to the Federal Reserve as collateral for an emergency loan to the fund

What may a Treasury money market fund hold?

US Treasury securities, and repurchase agreements collateralised by any US government or agency security

US Treasury securities, and short-dated certificates of deposit issued by the largest US banks

US Treasury securities, and municipal notes whose interest is exempt from federal income tax

US Treasury securities, and repurchase agreements fully collateralised by Treasury securities

Why does a prime money market fund typically pay a modestly higher yield than a government money market fund?

Its holdings outside government securities carry somewhat more credit risk, which the extra yield compensates

Its maturity limits are looser than a government fund's, so it can hold longer-dated, higher-yielding paper

Its interest income is exempt from federal income tax, which raises its yield after tax above a government fund's

It values its holdings at market prices, and the rise in their value is paid out to shareholders as extra yield

A money market fund has five hundred million shares outstanding and five hundred million dollars of assets, a dollar a share. Commercial paper it holds worth fifteen million dollars becomes worthless when the issuer files for bankruptcy, and the fund writes the holding down to zero. Before any redemptions, what is its net asset value per share?

Ninety-nine point seven cents a share

One dollar a share, the loss being spread over the holding's remaining life

In the days after the Reserve Primary Fund broke the buck in September 2008, investors withdrew hundreds of billions of dollars from prime money market funds. Which market did that run threaten to freeze, and why did it matter?

The Treasury bill market, on which the federal government relied to refinance its maturing debt

The municipal note market, on which states and cities relied to fund their day-to-day operations

The commercial paper market, on which hundreds of large corporations relied for short-term funding

The interbank deposit market, on which banks relied to fund the savings withdrawals of their customers

How far does FDIC insurance protect savings, checking and certificate of deposit balances at an insured bank?

Up to two hundred and fifty thousand dollars per depositor, per insured bank, per ownership category

Up to two hundred and fifty thousand dollars per depositor in total, however many banks hold the money

Up to one hundred thousand dollars for each separate account, however many accounts are held at the bank

Up to one million dollars per household, divided equally among the people named on the accounts

For most practical purposes, how does access to cash in a money market fund compare with access to cash held in a bank deposit?

Slower for the fund, whose redemptions are paid only once the holdings sold to meet them settle

Broadly comparable, both normally giving immediate or next-business-day access to the money held in them

Slower for the deposit, which a bank may hold for thirty days while fund redemptions are paid at once

Comparable for government funds alone, prime fund redemptions being paid at the end of each month

A brokerage account's sweep arrangement moves the client's uninvested cash into a designated money market fund at the end of each trading day. What is the arrangement for?

Letting the firm lend the cash to its own margin customers overnight at a profit to itself

Settling the day's trades in the account, the fund paying for purchases on the client's behalf

Making sure idle cash earns a return instead of sitting uninvested in the account

Locking the cash away until the client gives the firm written notice of a withdrawal

A client's living expenses run to six thousand dollars a month, and she keeps her emergency reserve in a money market fund. Following the typical planning guideline, how large should that reserve be?

Between six and eighteen thousand dollars

Between thirty-six and seventy-two thousand dollars

Between seventy-two and one hundred and forty-four thousand dollars

Between eighteen and thirty-six thousand dollars

Money Market Fund: Rule 2a-7, NAV and Breaking the Buck

What Is a Money Market Fund?

A money market fund is a type of open-end mutual fund that invests exclusively in high-quality, short-term debt instruments including Treasury securities, government agency obligations, repurchase agreements, commercial paper, certificates of deposit, and other money market instruments, with the objective of maintaining a stable net asset value of one dollar per share while providing investors with a rate of return competitive with prevailing short-term market rates and immediate liquidity through the ability to redeem shares on any business day. Money market funds serve as the primary investment vehicle through which both retail and institutional investors access the money market, pooling their assets to invest in diversified portfolios of money market instruments that provide the safety, liquidity, and return characteristics of direct money market investing without the minimum denomination requirements and operational complexity of purchasing individual money market instruments directly.

Money market funds occupy a unique position in the investment landscape, functioning simultaneously as investment vehicles generating modest returns and as cash management tools providing immediate liquidity and capital preservation. For millions of individual investors, money market funds represent the primary parking place for idle cash between longer-term investments, providing a higher return than bank savings accounts while maintaining immediate accessibility. For institutional investors including corporations, pension funds, endowments, and government entities, money market funds serve as efficient and highly liquid vehicles for managing the large cash balances that arise from the timing differences between cash inflows and outflows in their operations.

The money market fund industry was established in the United States in 1971 with the launch of the Reserve Fund, the first money market mutual fund, which was designed to provide retail investors with access to the higher yields available in the money market that had previously been accessible only to large institutional investors. The industry grew dramatically in the 1970s and 1980s as investors sought higher-yielding alternatives to bank deposits constrained by Regulation Q interest rate ceilings, and it has since grown into a multi-trillion-dollar industry that plays a central role in the functioning of the short-term credit markets.

How Money Market Funds Work

Money market funds operate under the Investment Company Act of 1940 as registered investment companies, subject to the specific rules established by the SEC under Rule 2a-7, which governs the portfolio composition, maturity constraints, liquidity requirements, credit quality standards, and valuation methodology applicable to money market funds.

Rule 2a-7 establishes the fundamental parameters that define a money market fund and distinguish it from other types of fixed income funds. The rule imposes maximum maturity limits on individual portfolio securities, typically requiring that no security have a remaining maturity of more than three hundred and ninety-seven days, with a weighted average maturity of the portfolio not exceeding sixty days and a weighted average life not exceeding one hundred and twenty days. These maturity constraints limit the price risk of the fund’s portfolio by ensuring that the securities held will mature and be repaid in the near term, preventing the accumulation of significant interest rate risk that could destabilise the fund’s net asset value.

Until the SEC’s 2015 amendments, credit quality requirements under Rule 2a-7 limited money market funds to investing in securities that had received one of the two highest short-term credit ratings from the major rating agencies, or that the fund’s board of directors deemed to be of comparable quality if the securities were unrated. Those amendments, adopted in September 2015 to implement Section 939A of the Dodd-Frank Act and required from 14 October 2016, removed the rating references: a money market fund may now buy a security only if the fund’s board, or its delegate, determines that it presents minimal credit risks, on an analysis of the issuer’s financial condition, sources of liquidity, ability to withstand adverse events and industry position. A fund may still weigh ratings in that analysis, and must disclose on Form N-MFP any rating its board considered. Government money market funds that invest exclusively in US government securities and repos collateralised by government securities are subject to less stringent credit quality requirements because the underlying government obligations carry the full faith and credit backing of the US government. The credit quality requirements ensure that the portfolio’s default risk is minimal, supporting the stability of the fund’s net asset value.

Liquidity requirements imposed by Rule 2a-7 as enhanced following the 2008 financial crisis require money market funds to maintain minimum percentages of their portfolios in daily liquid assets, which can be converted to cash within one business day, and in weekly liquid assets, which can be converted to cash within five business days. These liquidity buffers ensure that the fund can meet redemption requests promptly even during periods of market stress when the liquidity of certain portfolio instruments may be reduced, reducing the risk of a fund being unable to meet redemptions in a timely manner.

The stable net asset value of one dollar per share is maintained by most money market funds through the use of amortised cost accounting, under which portfolio securities are valued at their purchase price adjusted for the amortisation of any premium or accretion of any discount over the remaining life of the security, rather than at their current market value. This amortised cost methodology eliminates the daily fluctuations in reported net asset value that would result from marking portfolio securities to market, providing investors with the certainty of a stable one dollar per share value that makes money market funds function as near-cash instruments. The stability of the one dollar NAV is what makes money market funds practically equivalent to bank deposits for many investors, despite the absence of FDIC insurance.

Types of Money Market Funds

Following the comprehensive regulatory reforms implemented by the SEC in 2014 and 2016 in response to the 2008 financial crisis, money market funds are divided into several distinct categories that differ in their eligible investments, their NAV methodology, and the redemption restrictions that may apply during periods of fund stress.

Government money market funds invest at least ninety-nine point five percent of their total assets in cash, US government securities, or repurchase agreements fully collateralised by US government securities. Government money market funds are permitted to maintain a stable one dollar per share net asset value using amortised cost accounting and are not subject to the liquidity fee provisions applicable to prime money market funds unless they choose to adopt the discretionary fee, and since the 2023 amendments no money market fund may impose a redemption gate. The combination of the highest credit quality underlying investments, the stable NAV, and the absence of potential redemption restrictions makes government money market funds the most conservative and most widely used category of money market fund for both retail and institutional investors seeking maximum safety for their short-term cash.

Treasury money market funds are a subcategory of government money market funds that invest exclusively in US Treasury securities and repos fully collateralised by Treasury securities, providing the highest possible credit quality within the money market fund universe. Treasury money market funds qualify for the stable NAV and are exempt from potential liquidity fees and redemption gates, making them the most conservative option for investors who prioritise absolute safety above all other considerations.

Prime money market funds, also called general purpose money market funds, invest in a broader universe of money market instruments including commercial paper, certificates of deposit, banker’s acceptances, and other non-government money market instruments in addition to government securities, providing a modest yield advantage above government funds in exchange for the somewhat higher credit risk of the non-government portfolio components. Following the 2016 SEC reforms, institutional prime money market funds are required to maintain a floating net asset value calculated using current market prices rather than amortised cost, eliminating the stable one dollar NAV that historically made these funds indistinguishable from government money market funds for many investors. Institutional prime funds are also subject to liquidity fees during periods of significant redemption pressure, mandatory since the 2023 amendments removed redemption gates, providing the fund with tools to manage liquidity stress but potentially limiting investor access to their funds during market crises.

Retail prime money market funds, which are limited to investors who are natural persons rather than institutional investors, may continue to maintain a stable one dollar per share NAV but are also subject to potential discretionary liquidity fees. The distinction between institutional and retail prime funds reflects the SEC’s recognition that institutional investors are more likely to engage in rapid large-scale redemptions during periods of market stress, creating the run dynamics that destabilised prime money market funds during the 2008 crisis.

Municipal money market funds invest primarily in short-term municipal securities and provide investors with interest income that is generally exempt from federal income tax, making them particularly attractive for investors in higher tax brackets who hold money market assets in taxable accounts. Municipal money market funds may maintain a stable NAV if they qualify as retail funds and are structured accordingly.

Breaking the Buck

Breaking the buck is the term used to describe the event in which a money market fund’s net asset value falls below one dollar per share, representing the failure of the fund to maintain the stable one dollar NAV that is the defining characteristic and primary promise of money market fund investing. Breaking the buck is one of the most serious events that can occur in the money market fund industry, as it violates investors’ fundamental expectation of capital preservation and can trigger mass redemptions as investors flee the affected fund and potentially the money market fund sector as a whole.

The Reserve Primary Fund’s breaking of the buck on September 16 2008, the day after Lehman Brothers filed for bankruptcy, was the most consequential event in money market fund history and one of the most consequential events of the 2008 financial crisis. The Reserve Primary Fund held approximately 785 million dollars of commercial paper issued by Lehman Brothers, which became worthless following Lehman’s bankruptcy filing. The resulting write-down of the Lehman holdings caused the fund’s NAV to fall to ninety-seven cents per share, below the one dollar threshold. The announcement that the Reserve Primary Fund had broken the buck triggered an immediate and massive run on money market funds across the industry, with institutional investors withdrawing hundreds of billions of dollars from prime money market funds in the days following the announcement, threatening to freeze the commercial paper market on which hundreds of large corporations depended for their short-term funding.

The systemic consequences of the Reserve Primary Fund’s breaking of the buck led to two major government interventions designed to stabilise the money market fund sector. The Treasury Department temporarily guaranteed all existing money market fund balances as of the date of the guarantee announcement, providing investors with the assurance that their money market fund assets were protected from further breaking of the buck events. The Federal Reserve established the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility to provide financing to banks that purchased asset-backed commercial paper from money market funds, providing the funds with a mechanism to meet redemption requests without being forced to sell their commercial paper holdings at distressed prices into an illiquid market.

The 2014 and 2016 Reforms

The traumatic experience of the 2008 money market crisis prompted the SEC to implement comprehensive reforms to Rule 2a-7 in 2014 and 2016 designed to reduce the systemic risks posed by money market funds while preserving their utility as cash management vehicles.

The floating NAV requirement for institutional prime money market funds, described above, was the most controversial and most consequential of the 2014 reforms, fundamentally changing the character of institutional prime funds by eliminating the stable one dollar NAV that had made them indistinguishable from cash for many institutional investors. The floating NAV requirement was designed to eliminate the first-mover advantage that made money market fund runs self-reinforcing, by ensuring that all investors face the same mark-to-market loss if the fund’s portfolio declines in value rather than allowing early redeemers to exit at the full one dollar NAV while late redeemers absorb the full impact of any portfolio losses.

The liquidity fee and redemption gate provisions of the 2014 reforms allowed the board of directors of a prime money market fund to impose a redemption fee of up to two percent or to suspend redemptions entirely for up to ten business days when the fund’s weekly liquid assets fell below specified minimum levels. These provisions gave funds tools to manage liquidity stress by slowing the pace of redemptions and allowing the fund time to raise cash through portfolio maturities and asset sales rather than being forced into a fire sale of all liquid assets to meet immediate redemption demands.

The enhanced liquidity requirements adopted in 2023 increased the minimum percentages of daily and weekly liquid assets that money market funds must maintain, to twenty-five and fifty percent, providing larger buffers against redemption pressure and reducing the likelihood that a fund would need to resort to liquidity fees in the first place.

The 2023 SEC amendments to Rule 2a-7 introduced additional reforms. They imposed mandatory liquidity fees on institutional prime and institutional tax-exempt funds when daily net redemptions exceed five percent of net assets, a fee structure designed to allocate the costs of liquidity stress to redeeming investors rather than allowing them to exit at the expense of remaining shareholders; they cut the link between liquidity fees and a fund’s weekly liquid assets while keeping, for every money market fund other than a government fund, the board’s discretion to impose a liquidity fee of up to two percent whenever it determines that a fee is in the fund’s best interests; and they removed the option to impose discretionary redemption gates that had been criticised as potentially worsening a run by signalling fund distress.

Money Market Funds vs Bank Deposits

The comparison between money market funds and bank deposits is one of the most practically important for individual investors and is frequently misunderstood in ways that create material risk management errors.

The most fundamental difference is the presence or absence of federal deposit insurance. Bank deposits including savings accounts, checking accounts, and certificates of deposit at FDIC-insured banks are protected up to two hundred and fifty thousand dollars per depositor per institution per ownership category, as described in the Certificate of Deposit article in Section C. Money market fund shares are not FDIC-insured and are not guaranteed against loss by any government agency despite their safety characteristics and stable NAV convention. The Reserve Primary Fund’s breaking of the buck demonstrated concretely that money market funds can lose value, and while this event was exceptional and the subsequent regulatory reforms were designed to reduce its likelihood, the risk of loss cannot be eliminated entirely.

The return characteristics of money market funds typically exceed those of bank savings accounts and money market deposit accounts, reflecting the absence of FDIC insurance and the slightly higher risk associated with money market fund investing. During periods of rising interest rates, money market fund yields respond relatively quickly to rate increases as the short-maturity portfolio rolls over into higher-yielding instruments, while bank deposit rates may lag significantly behind market rates due to banks’ tendency to reprice deposits more slowly than market rates change.

The liquidity characteristics of money market funds and bank deposits are broadly comparable for most practical purposes, with both providing immediate or next-business-day access to funds. However the potential for temporary restrictions on money market fund redemptions through liquidity fees, particularly for institutional prime money market funds, distinguishes them from bank deposits where the FDIC insurance backstop essentially eliminates the risk of inability to access insured deposits.

Money Market Funds in Investment Advisory Practice

For investment advisers managing client portfolios, money market funds serve several important practical functions that must be understood and managed effectively.

Cash management within client portfolios involves the allocation of uninvested cash balances to money market funds that provide a competitive return while preserving capital and maintaining immediate accessibility for reinvestment or withdrawal. The selection of the appropriate money market fund category for client cash holdings, considering the trade-off between the higher yield of prime money market funds and the greater safety and stability of government money market funds, is an investment decision that must be made in the context of the client’s overall risk tolerance and their need for absolute capital certainty.

Sweep arrangements in brokerage accounts automatically invest uninvested cash balances into a designated money market fund at the end of each trading day, ensuring that idle cash earns a return rather than sitting uninvested. The selection of the sweep fund by the broker-dealer is subject to Regulation Best Interest obligations, requiring the broker-dealer to consider the client’s best interests when designating the sweep vehicle, including the yield, safety, and other characteristics of available sweep options.

Emergency fund holdings for clients who maintain their emergency reserves in money market funds benefit from the liquidity and relative safety of these vehicles while earning a return above zero on balances that must remain immediately accessible. The appropriate amount to hold in a money market fund as an emergency reserve, typically three to six months of living expenses as discussed in the Financial Adviser article, is one of the fundamental financial planning recommendations that investment advisers make to their clients.

Examination Relevance and Key Takeaways

Money market funds are tested on the SIE and Series 65 examinations in the context of investment company types, the regulatory framework governing money market funds under Rule 2a-7, the distinction between government and prime money market funds, the breaking of the buck concept and its regulatory consequences, and the comparison between money market funds and bank deposits. Candidates must understand the definition and function of money market funds, the key Rule 2a-7 requirements including maturity limits, credit quality standards, liquidity requirements, and NAV methodology, the major fund categories including government, Treasury, prime, and municipal money market funds and their distinctive characteristics, the breaking of the buck phenomenon and the 2008 crisis that prompted regulatory reform, and the key differences between money market funds and bank deposits particularly regarding FDIC insurance.

The core points to retain are these: a money market fund is an open-end mutual fund investing in high-quality short-term debt instruments seeking to maintain a stable one dollar NAV while providing liquidity and a competitive short-term return; Rule 2a-7 governs money market funds with requirements including maximum three hundred and ninety-seven day individual security maturity, sixty day weighted average maturity, minimum daily and weekly liquidity percentages, and high credit quality standards; government money market funds investing in Treasury and agency securities maintain a stable NAV and are not subject to liquidity fees or redemption gates; institutional prime money market funds must maintain a floating NAV and are subject to mandatory liquidity fees when daily net redemptions exceed five percent of net assets; breaking the buck occurs when the NAV falls below one dollar per share with the Reserve Primary Fund’s breaking of the buck in September 2008 following Lehman Brothers’ bankruptcy triggering a systemic run on prime money market funds; the 2016 SEC reforms introduced floating NAV for institutional prime funds and liquidity fee and gate provisions while the 2023 amendments removed redemption gates and added mandatory liquidity fees for institutional prime and institutional tax-exempt funds alongside the discretionary fee that every non-government fund keeps; money market funds are not FDIC-insured unlike bank deposits making government money market funds safer in absolute terms despite their similar practical liquidity; and money market funds serve investment advisers and their clients as cash management vehicles, sweep account instruments, and emergency fund repositories.