The SEC's proposal would require "prime" funds held by corporate treasurers and other institutional investors to abandon their fixed $1 share price, allowing the funds' prices to float like those of other mutual funds.
Prime funds invest in short-term corporate debt and are considered more risky than funds that buy only government securities.
The reform is a direct response to what happened in 2008 when the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brother debt and could not maintain its $1 per share price, thus “breaking the buck” and precipitating the rush of withdrawals by institutional investors from the market.
The SEC is also considering giving institutional and retail funds the authority to impose so-called “liquidity fees and redemption gates” during times of stress.
The objective is to stop investor withdrawals from turning into runs, though some regulators say it might trigger runs if investors try to redeem their shares ahead of the anticipated restrictions.
All five SEC commissioners voted unanimously on Wednesday to put the plan out for 90 days of public feedback.
However, many firms, including Fidelity Investments, the largest money-fund sponsor, have warned that floating share prices would not be able to stop runs in a crisis.
The industry also warned that further major reforms could drive away investors and jeopardise the industry.
In November, the Financial Stability Oversight Council issued its own recommendations to overhaul money funds after the SEC, beset by internal disagreements and industry lobbying, failed to agree on a plan.
The renewed action was triggered by heavy pressure from fellow financial regulators – including Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Timothy Geithner – who threatened to override the SEC if it failed to act.