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Government to Tighten Grip on Investments Three Years Too Late (Update 1)

Stocks in this article: FII SCHW LM

(Adds that shares of several big money market fund managers slipped Tuesday on the report of the SEC's proposed industry changes.)

BOSTON ( TheStreet) -- The Securities and Exchange Commission is floating several ideas about how to protect money market fund investors in the event of a financial panic. What has been proposed so far has the $2.7 trillion money market fund industry in a lather.

The SEC's proposals, still in the early stages, are seen hurting fund investor returns and likely precipitating big withdrawals, say fund industry representatives.

And they add that regulatory changes made in 2010 have proven enough to protect investors making more rules unnecessary.

Money-market funds, which invest in short-term debt instruments and pay higher rates than traditional savings accounts, aren't guaranteed by the government, and so investors could potentially lose capital in the event of a run on such funds.

The proposed changes, part of a two-part plan expected to be made public within a few weeks, come three years after the collapse of Lehman Brothers. That event precipitated a run on one of the firm's money market funds and that spread, resuting in mass redemptions of other firms' money markets by panicked investors.

The government had to step in and back-stop funds that had fallen below their traditional benchmark, the $1 net asset value, in order to ease investor fears.

So now the SEC apparently wants to add further protections for investors by raising the capital that funds are required to hold, among other proposals.

Perhaps most controversially, at least from an investor's standpoint, one proposal would limit investors who want to redeem all of their holdings immediately, as they can now, to 95% of their balance, with the remaining 5% to be returned to them after 30 days, according to a story in Tuesday's Wall Street Journal.

The other proposals come down on the fund company side, but would likely result in higher fees for investors, which means lower returns for them.

Under one proposal, fund companies would be required to boost their capital base in their funds either by putting more of their own money into them, or by issuing stock or debt to increase the fund's capital, or by collecting more money from shareholders.

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