Cash may seem like the least interesting asset class at this point with interest rates hovering near or at zero for the past several years, but there was a major shift in policy last Thursday.

For the most part, investors forget that most cash is actually parked in money market mutual funds.  The money market funds invest in short-term government bills from around the world and debt issued by corporations called commercial paper.

During the 2008 financial crisis, there was a run on one of the oldest money market mutual funds called the Primary Fund that ‘broke the buck’ after Lehman Brothers went bankrupt.

In this case, the Primary Fund was holding commercial paper issued by Lehman Brothers and when Lehman went under, Primary didn’t get paid, which meant that the value of the money market mutual funds lost value.

Although investors should realize that their money market mutual funds can lose money (especially like institutional investors that held the Primary Fund), it’s easy to forget, especially during a crisis.

We have always taken a conservative approach to money market mutual funds, only using ones that invest in US government or US Treasury bills.  They have always paid less interest than the other versions, but the difference was too small in our mind to take the extra risk.

Before 2008, our approach seemed like a ‘belt and suspender’ approach (or even three belts and four suspenders), but it was a little bit of a relief in 2008 to know that the cash was safe (although nothing actually felt safe then).

We were aware of the fact that other money market mutual funds had got into trouble in previous years, although in most (if not all) cases, the fund sponsor took their own money and put it in the fund so that the investors didn’t lose anything.

Six years after this crisis, the Securities and Exchange Commission (SEC) is now engaged in money market reform, requiring large institutional money market funds to ‘float’ their value.  This simply means that if the portfolio of bills and commercial paper goes down in value, so will the money market mutual fund.  (See their press release here.)

This only applies to institutional investors though, so called ‘prime’ money market funds; it doesn’t apply to retail-oriented money market funds like those offered by Schwab, Vanguard or other firms that cater to individual investors.

Personally, I have mixed feelings about this.  In some ways, I feel like if investors are willing to take the extra risk trying to squeeze out a little yield, they should be willing to take the loss that goes along with the extra risk – that’s how markets work.

At the same time, a run on the bank is about as dangerous as it gets and anything that can help reduce the risk of a run is a benefit.

I suppose that the SEC agreed because, in a sense, they ‘split the baby’ by forcing institutional investors to take the hit while keeping the little guys whole.  Score one for the little guys.