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How to restore trust in money market funds

If the idea of having precious cash tied up brings back dark memories of the sudden clamping down of billions of dollars of funds during the credit crisis, you’re not alone.

By some counts, the auction-rate securities mess has left hundreds of billions of dollars trapped in a short-term market that many had been told was as good as cash — just with better returns. That’s enough to keep any investor wary.

Even money market mutual funds, which few questioned as a risky place to park cash, became suspect after Lehman Brothers-related losses snapped the sacrosanct $1 net asset value for the Reserve Primary Fund and set off a $300 billion run on these investment vehicles. Investors in that fund are still fighting for their money back.

The Securities and Exchange Commission has laid out a proposal to tighten regulation on these mutual funds in an attempt to restore confidence in this $3.8 trillion market, where about a fifth of households stash their money. But the proposals themselves highlight what is still worrying about so-called cash-equivalent funds — they lack the simplicity and liquidity of the real thing.

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