The SEC just passed a rule that changes the way money market accounts are valued, but it's not just investors that will be impacted. It could also change the way accounting software keeps track of capital gains and losses.
Money market funds used to be treated as fixed prices equal to $1 per share -- similar to savings accounts where a dollar is worth a dollar, regardless of time. But under the new SEC rule, money market funds will be priced on a floating system that reflects market movements. In simple terms, the accounts will have capital gains and losses that must be accounted for under the current tax code.
The SEC voted July 23 to implement a floating net asset value (NAV) for prime institutional money market funds, as opposed to the previous NAV that remained fixed at $1. This is an attempt at providing more transparency into a fund's underlying market value.
Since mutual funds are currently fixed at "$1 par," there is technically no capital gains/losses, but that will change once the floating system is implemented. Accounting software will need to reflect the 1099Bs capital gains and losses unless this tax code is changed.
The SEC has discussed with the Treasury Department how to make these gains/losses nontaxable, but as of now, the issue isn't resolved. This change could soon force all accounting firms to embed tax accounting software that reflects these new gains and losses.
Money market accounts are a $2.6 trillion industry that impacts nearly every investor who parks cash, so this new SEC rule has large ramifications for a large number of investors, as well.
The new rule won't impact your tax returns as an individual, but the floating NAV points out a risk that has always existed for investors. A money market fund should never be treated as cash. It is still a fund that should be treated as part of your portfolio of risky corporate debt securities. Investors will find better yields and less risk in FDIC-backed bank savings accounts.James Sanford is a performance fee-only financial advisor and portfolio manager for Sag Harbor Advisors (Sag Harbor Advisors). James Sanford has worked with Credit Suisse Securities, JP Morgan Securities and Gleacher & Co. He's been on Fox Business News, CNBC's 'Closing ... View Full Bio