TIME CEO pay

These Companies Have the Biggest CEO-Worker Pay Gaps

<> on July 7, 2015 in Sun Valley, Idaho.
Scott Olson—2015 Getty Images Discovery Communications CEO David M. Zaslav.

Glassdoor offers sneak peek into future pay disclosures

Glassdoor released a report Tuesday that shows the average CEO earns around 204 times what the company’s median worker receives.

The SEC adopted a new rule this month that will require publicly traded companies to disclose the ratio of CEO pay to median worker pay. Glassdoor has been ahead of the curve on this pay transparency mission, collecting voluntary and anonymous salary reports from employees since 2008. Glassdoor used the data to compile a report that shows what the ratios might look like once the SEC rule goes into effect in January 2017.

The highest CEO-worker pay ratio was found at Discovery Communications, where CEO David M. Zaslav makes 1,951 times more than his median workers. Zaslav took home $156 million in 2014, while median pay at the media company was $80,000.

Chipotle Mexican Grill came second on the list, with a pay ratio of 1,522, while CVS Health was third with a ratio of 1,192.

Microsoft’s CEO-worker pay ratio of 615 was the highest of the companies Glassdoor measured in the technology sector. Google’s ratio was 0, as CEO Larry Page receives a $1 annual salary. CEOs such as Page often get the vast majority of their income from their large share holdings.

TIME insider trading

Ex-Dean Foods Chairman, Golfer Mickelson Probed Over Insider Trading

Deutsche Bank Championship - Round Three
Ross Kinnaird—Getty Images Phil Mickelson

Investigation may be getting more complicated, report says

What do activist investor Carl Icahn, former chairman of Dean Foods Thomas Davis, Las Vegas sports bettor Billy Walters, and professional golfer Phil Mickelson have in common? According to the Wall Street Journal, a federal probe into a complex tangle of insider trading.

The Journal reported Wednesday that criminal and civil government authorities are looking into the possibility that Davis tipped off his acquaintance Walters, who tipped off his friend Mickelson, about a 2012 spin-off from Dean Foods. The investigation builds on one that started more than a year before that was searching for evidence that Walters and Mickelson received non-public information from Icahn. Icahn’s role in the investigation is currently dormant, according to the report.

The lengthy probe is a part of the government’s renewed focus on ferreting out insider trading. The probes have occurred nationwide, but Manhattan is certainly a hot-spot. Since Manhattan U.S. Attorney Preet Bharara took office in 2009, he’s charged 96 people of insider trading. Government officials looking to persecute insider traders may be tripped up by a federal appeals court decision in December that overturned the convictions of two former hedge fund traders.

TIME Apple

This Is How Much Apple Spends to Keep Tim Cook Safe

Photograph by Joe Pugliese

It's a lot

The life of a one of the world’s best-paid and most powerful CEOs sounds pretty sweet, except for one thing: lot’s of people are out to get you.

That’s the conclusion one must draw from taking a look at some of the security budgets of Fortune 100 CEOs. Apple, for instance, spent $699,133 keeping CEO Tim Cook safe in 2014, according to a security filing unearthed by Patently Apple.

And while that might seem like a lot of money, it actually pales in comparison to the security budgets of Oracle CEO Larry Ellison and Amazon CEO Jeff Bezos —their companies each spend more than $1.5 million on CEO-security, according to a report by Equilar.

TIME CEO pay

This CEO Has The Highest Pay Compared To His Workers

Photograph by Jesse Burke for TIME CVS Health CEO Larry Merlo

A new SEC rule will reveal the disparity between CEO and median worker pay.

The Securities and Exchange Commission on Wednesday made waves in approving 3-2 a rule that will require most public companies to regularly disclose the ratio of chief executive pay to that of the average employee.

The rule came at the urging of Democrats like Senator Elizabeth Warren and worker groups like the AFL-CIO.

And it was approved despite opposition from the business community and Republicans.

The Chamber of Commerce is expected to sue over the rule. The head of its Center for Capital Markets Competitiveness David Hirschmann said that the rule “is more harmful than hurtful” and that the Chamber will seek to “clean up the mess. “To steal a line from Justice Scalia, this is pure applesauce,” SEC Republican Commissioner Daniel Gallagher said to Reuters. Companies argued that calculating median wages of workers is not cut-and-dry, especially for companies with lots of overseas workers, and that the new rule represented unnecessary and costly regulation.

Of course, missing from companies’ argument is mention that the rule will also reveal data that won’t necessarily reflect well on them. After all, average CEO compensation for the largest firms was $16.3 million in 2014, according to the Economic Policy Institute’s analysis of CEO stock options, salary, bonuses, restricted stock grants, and long-term incentive payouts, resulting in an overall CEO-to-worker pay ratio of 303-to-1 in 2014. (The ratio was 20-to-1 in 1965.) It’s that disparity that advocates of the rule want out in the open. They think it will put pressure on companies by drawing attention to the growing inequality between compensation for workers at the top of the company hierarchy and those at the bottom.

Companies with the highest ratios will likely have the most explaining to do. First up might be CVS.

According to a Payscale report, which calculated ratios based on the cash compensation of CEOs at the 100 highest-grossing public companies in the United States in 2013, CVS CEO Larry Merlo has the highest pay compared to his employees: $12,112,603—422 times as much as the average CVS employee, who earns $28,700 per year.

Next up is Goodyear CEO Richard Kramer, whose cash compensation of $15,086,645 resulted in a CEO-to-worker pay ratio at the company of 323-to-1. Third place is Disney’s Bob Iger who earned $12,112,603 in 2013—283 times more than the average Disney employee’s compensation of $60,300.

Interestingly enough, the lowest ratios occurred at Google, where CEO Larry Page earned $1 in 2013 and at Sears, where CEO Eddy Lampert, earned the same. Next lowest is HP’s Meg Whitman, whose cash compensation of $535,335 in 2013 was just six times as much as the average HP employee’s—$84,500, followed by Warren Buffett, who earned $485,606 in cash in 2013—nine times more than the pay for Berkshire Hathaway employees, who make, on average, $56,900.

You can see Payscale’s full list of CEO-to-worker ratios and their methodology here.

 

MONEY

Five Years Ago Congress Tried to Fix Wall Street. How is That Going?

U.S. President Barack Obama points to co-sponsors of the Dodd-Frank Wall Street Reform and Consumer Protection Act, U.S. Sen. Christopher Dodd and U.S. Rep. Barney Frank, after signing it into law at the Ronald Reagan Building in Washington, July 21, 2010.
Larry Downing—Reuters President Barack Obama and the sponsors of the Wall Street reform act, Sen. Christopher Dodd and U.S. Rep. Barney Frank, in Washington, July 21, 2010.

Here's how the Dodd-Frank law affects you when you bank, borrow and invest. Some parts of the law are still in limbo.

Five years ago Tuesday, in the wake of the worst financial crisis since the Great Depression, the Dodd-Frank bill to reform Wall Street became the law of the land.

The 849-page law largely operates behind the scenes, setting out who will regulate Wall Street and how the government unwinds failing banks.

But two important aspects of Dodd-Frank were aimed squarely at making borrowing and investing safer for everybody. What have these parts of the law accomplished so far? Here’s a closer look:

The Consumer Financial Protection Bureau

Beyond the bank rules, this new agency is the best-known result of the Dodd-Frank law. It was championed by Harvard law professor Elizabeth Warren, who argued that the government should do more to keep consumers’ money safe when they borrow or bank, much as the Consumer Product Safety Commission tries to protect Americans from faulty toaster ovens or power tools. At that time homeowners were facing high payments on houses they suddenly couldn’t sell, often as result of new, complex kinds of mortgages and very aggressive lending practices. So the idea of the CFPB quickly gained steam in Washington. Warren ultimately didn’t get the nod to lead the agency, but she was subsequently elected to the Senate.

The CFPB has endured some growing pains. But the bureau also appears to be making headway in its mission. So far this year, the CFPB has succeeded in writing new rules requiring mortgage lenders to verify borrows can repay loans. It’s also gone after retail banking practives, ordering Citibank to pay $700 million for allegedly deceptively marketing of credit card add-on services.

The CFPB has fielded more than 600,000 consumer complaints against financial companies ranging from mortgage lenders to debt collectors. Last month the bureau began publishing the texts of more than 7,000 of these to highlight frequent problems. Up next: an overhaul of the confusing mortgage documents home buyers get and broader rules governing overdraft fees. However, some consumer advocates are worried these may not turn out to be strict enough.

Standards for investment advisers and brokers

Dodd-Frank also included a key provision that is supposed to protect investors from getting bad advice. Here action has been slower.

The new law gave the Securities and Exchange Commission the option to impose on financial advisers something called a “fiduciary” standard. A fiduciary has a duty to act in clients’ best interests when they recommend investments like mutual funds. While that may seem like a no-brainer, in fact, today many advisers are required only to recommend investments that are “suitable” for the investor, based on factors like age and risk tolerance.

The law stopped short of saying the SEC had to adopt this standard. While the past two SEC chairmen have indicated they would like to move forward, a full-court press by Wall Street lobbyists has successfully stalled those efforts.

The fiduciary standard isn’t dead. The Labor Department has taken up the mantle and is attempting to impose the rule for people advising on investment decisions like IRA rollovers. The Obama Administration has indicated support for the DOL’s effort, but as recently as last month, Republican-led Congress moved to prevent the Labor department from implementing the rule.

MONEY movies

Big Chain Movie Theaters Under Investigation by the Feds

Regal AMC movie theater antitrust
Russell Haydn / EyeEm—Getty Images/EyeEm

The Justice Department is scrutinizing cineplex giants AMC and Regal

There’s good news if you love movies—and having choices about them.

New Securities and Exchange Commission filings by cinema giants AMC and Regal confirm earlier reports that the government is investigating potential anti-competitive activity on the part of America’s biggest movie theater chains. The filings disclose the Department of Justice is looking into whether those companies used joint ventures and exclusivity agreements with movie studios in violation of antitrust laws.

Operators of small independent cinemas say exclusivity agreements, called “clearances,” are a problem because they allow big chains to prevent competitors from playing popular new movies.

That’s bad for consumers who want more theater options close to home—or prefer indie theaters, which sometimes offer special ticket discounts or features like food and drink service.

Tom Stephenson, CEO of a local Dallas multiplex, told the Dallas Morning News he has been cooperating with federal investigators. He claims AMC threatened not to play certain films unless movie studios granted the chain exclusive screening rights in his cinema’s area.

“The Justice Department is highly skeptical that limiting consumers’ choices is a good idea,” Stephenson told the newspaper.

Together the biggest three movie chains—AMC, Regal Entertainment Group and Cinemark Holdings—control about 42% of U.S. screens. In its filing, AMC acknowledges that it “has been an active participant in our industry’s consolidation,” having acquired several theater chains, including Loews and General Cinema, in the last two decades.

AMC also points out it’s easier to beat smaller competitors in big urban areas: “Where real estate is readily available, it is easier to open a theatre near one of our theatres, which may adversely affect operations at our theatre. However . . . the complexity inherent in operating in . . . major metropolitan markets is a deterrent to other less sophisticated competitors, protecting our market share position.”

Both AMC and Regal’s filing state that the companies’ managers do not believe they have violated federal or state antitrust laws.

“One has to remember that film clearances, they’ve existed for many years and we believe they have because they are beneficial to the studios, they are beneficial to exhibition and they are beneficial to consumers,” Regal Entertainment Chief Executive Amy Miles said in a recent conference call.

Ironically, clearances were originally created to protect small, independent theaters after a 1948 Supreme Court decision required movie studios to divest ownership in cinemas.

MONEY fiduciary

If Humans Can’t Offer Unbiased Financial Advice to the Middle Class, These Robots Will

Wall Street says it can't be a "fiduciary" to everyone who wants financial advice. But the new breed of "robo advisers" is happy to take the job.

Fast-growing internet-based investment services known as robo-advisers have already begun to upend many aspects of the investment business. Here’s one more: Potentially reshaping the long-standing debate in Washington over whether financial advisers need to act in their clients’ best interests.

If you work with a financial adviser you may assume he or she is legally obligated to give you unbiased advice. In fact, that’s not necessarily the case. Many advisers—the ones who are technically called brokers—in fact face a much less stringent legal and ethical standard: They’re required only to offer investments that are “suitable” for you based on factors like age and risk tolerance. That leaves room for brokers to steer clients to suitable but costly products that deliver them high commissions.

The issue is especially troubling, say many investor advocates, because research shows that most consumers don’t understand they may be getting conflicted advice. And the White House recently claimed that over-priced advice was reducing investment returns by 1% annually, ultimately costing savers $17 billion a year.

Now the Labor Department has issued a proposal that, among other things, would expand the so-called fiduciary standard to advice on one of financial advisers’ biggest market segments, Individual Retirement Accounts. A 90-day comment period ends this summer.

Seems like an easy call, right? Not so fast. Wall Street lobbyists contend that forcing all advisers to put clients first would actually hurt investors. Their argument? Because advisers who currently adhere to stricter fiduciary standards tend to work with wealthier clients, forcing all advisers to adopt it would drive those who serve less wealthy savers out of the business. In other words, according to the National Association of Insurance and Financial Advisors and the U.S. Chamber of Commerce, a fiduciary standard would mean middle-class investors could end up without access to any advice at all.

(Why, you might ask, would anyone in Washington listen to business rather than consumer groups about what’s best for consumers? Well, that is another story.)

What’s interesting about robo-advisers, which rely on the Internet to deliver automated advice, is that they have potential to change the dynamic. Robo-advisers have been filling this gap, offering investors so-called fiduciary advice with little or no investment minimums at all. For instance, Wealthfront, one of the leading robo-advisers, has a minimum account size of just $5,000. It’s free for the first $10,000 invested and charges just 0.25% on amounts over that. Arch-rival Betterment has no account minimum at all and charges just 0.35% on accounts up to $10,000 when investors agree to direct deposit up to $100 a month.

Of course, these services mostly focus on investing—clients can expect little in the way of individual attention or holistic financial planning. But the truth is that flesh-and-blood advisers seldom deliver much of those things to clients without a lot of assets. What’s more, the dynamic is starting to change. Earlier this month, fund giant Vanguard launched Personal Advisor Services that will offer individual financial planning over the phone and Internet for investors with as little as $50,000. The fee is 0.3%.

The financial services industry says robo-advisers shouldn’t change the argument. Juli McNeely, president of the National Association of Insurance and Financial Advisors, argues that relying on robo-advisers to fill the advice gap would still deprive investors of the human touch. “It all boils down to the relationship,” she says. “It provides clients with a lot of comfort.”

But robo-adviser’s growth suggests a different story. Wealthfront and Betterment, with $2.3 billion and $2.1 billion under management, respectively, are still small but have seen assets more than double in the past year.

And Vanguard’s service, meanwhile, which had been in a pilot program for two years before it’s recent launch, already has $17 billion under management.

Vanguard chief executive William McNabb told me last week that, although Vanguard had reservations about the specific legal details of past proposals, his company supports a fiduciary standard in principle. Small investors, he says, are precisely the niche that robo-advisers are “looking to fill.”

 

 

 

 

 

MONEY investment strategies

Why Even “Proven” Investment Strategies Usually Fail

Monopoly money
Alamy—Alamy Beware investment strategies that haven't been tried with real money.

Anyone with a computer can find a stock picking strategy that would have worked in the past. The future is another story.

You probably know, because you’ve read the boilerplate disclaimer in mutual fund ads, that past performance of an investment strategy is no indicator of future results.

And yet, funnily enough, nearly everyone in the investment business cites past results, especially the good results. Evidence that an investment strategy actually worked is a powerful thing, even if one knows intellectually that yesterday’s winners are more often than not tomorrow’s losers. At the very least, it suggests that the strategy isn’t merely a swell theory—it’s been tested in the real world.

Except that sometimes you can’t take the “real world” part for granted.

Just before Christmas, an investment adviser called F-Squared Investments settled with the Securities and Exchange Commission, agreeing to pay the government $35 million. According to the SEC, F-Squared had touted to would-be clients an impressive record for its “AlphaSector” strategy of 135% cumulative returns from 2001 to 2008, compared with 28% in an S&P 500 index. Just two problems:

First, contrary to what some of F-Squared’s marketing materials said, the AlphaSector numbers for this period were based solely on a hypothetical “backtest,” and there was no real portfolio investing real dollars in the strategy. In other words, after the fact, F-Squared calculated how the strategy would have performed had someone had the foresight to implement it. Underscoring how abstract this was, the backtest record spliced together three sets of trading rules deployed (hypothetically) at different times. The third trading model, which was assumed to go into effect in 2008, was developed by someone who, the SEC noted in passing, would have been 14 years old at the beginning of the whole backtest period, in 2001. (The AlphaSector product was not launched until late 2008; its record since it went live is not in question.)

Second, even the hypothetical record was inflated, says the SEC. The F-Squared strategy was to trade in and out of exchange traded funds based on “signals” from changes in the prices of the ETFs. But F-Squared’s pre-2008 record incorrectly assumed the ETFs were bought or sold one week before those signals could possibly have flashed. The performance, says the SEC, “was based upon implementing signals to sell before price drops and to buy before price increases that had occurred a week earlier.” Not surprisingly, a more accurate version of even the hypothetical strategy would have earned only 38% cumulatively over about seven years, not 135%.

Call it a woulda, shoulda—but not coulda—track record.

Steve Gandel at Fortune has been following this story for some time and has the breakdown here on how it all happened. This kind of thing is (one hopes) an extreme case. But there’s still a broader lesson to draw from this tale.

Although it’s a no-no to say that a strategy is based on a real portfolio when it isn’t, there’s not a blanket rule against citing hypothetical backtest results. In fact, backtesting is a routine part of the money management business. Stock pickers use it to develop their pet theories. Finance professors publish papers showing how this or that trading strategy could have beaten the market. Index companies use backtests to construct and market new “smart” indexes which can then be tracked by ETFs. But even when everyone follows all the rules and discloses what they are doing, there’s growing evidence that you should be skeptical of backtested strategies.

Here’s why: In any large set of data—like, say, the history of the stock market—patterns will pop out. Some might point to something real. But a lot will just be random noise, destined to disappear as more time passes. According to Duke finance professor Campbell Harvey, the more you look, the more patterns, including spurious ones, you are bound to spot. (Harvey forwarded me this XKCD comic strip that elegantly explains the basic problem.) A lot of people in finance are combing through this data now. But if they haven’t yet had to commit real money to an idea, they can test pattern after pattern after pattern until they find the one that “works.” Plus, since they already know how history worked out—which stocks won, and which lost—they have a big head start in their search.

In truth, the problem doesn’t go away entirely even when real money is involved. With thousands of professional money managers trying their hands, you’d expect many to succeed brilliantly just by fluke. (Chance predicts that about 300 out of 10,000 managers would beat the market over five consecutive years, according to a calculation by Harvey and Yan Liu.)

So how do you sort out the random from the real? If you are considering a strategy based on historical data, ask yourself three questions:

1) Is there any reason besides the record to think this should work?

Robert Novy-Marx, a finance professor at the University of Rochester, has found that some patterns that seem to predict stock prices work better when Mars and Saturn are in conjunction, and that market manias and crashes may correlate with sunspots. His point being not that these are smart trading strategies, but that you should be very, very careful with what you try to do with statistical patterns.

There’s no good reason to think Mars affects stock prices, so you can safely ignore astrology when putting together your 401(k). Likewise, if someone tells you that, say, a stock that rises in value in the first week of January will also rise in value in the third week of October, you might want to get them to explain their theory of why that would be.

2) What’s stopping other investors from doing this?

If there’s a pattern in stock prices that helps predict returns, other investors should be able to spot it. (Especially once the idea has been publicized.) And once they do, the advantage is very likely to go away. Investors will buy the stocks that ought to do well, driving up their price and reducing future returns. Or investors will sell the stocks that are supposed to do poorly, turning them into bargains.

That doesn’t mean all patterns are meaningless. For example, Yale economist Robert Shiller has found that the stock market tends to do poorly after prices become very high relative to past earnings. It may be that prices get too high in part because fund managers risk losing their jobs if they refuse to ride a bull market. Then again, the same forces that affect fund managers will probably affect you too. Will you being willing to stay out of the market and accept low returns while your friends and neighbors are boasting of double-digit gains?

And even Shiller’s pattern doesn’t work all the time—stock prices can stay high for years before they come down. Betting that you can see something that’s invisible to everyone else in the market is a risky proposition.

3) Does it work well enough to justify the expense?

Lots of strategies that look good on paper fade once you figure in real-world trading costs and management fees. A mutual fund based on the AlphaSector strategy, by the way, charges about 1.6% per year for its A-class shares. That’s eight times what you’d pay for a plain-vanilla index fund, which is all but certain to deliver the market’s return, minus that sliver of costs. And there’s nothing hypothetical about that.

MONEY financial advisers

Your Investment Adviser Needs an Annual Inspection

Car inspection
Abel Mitja Varela—Getty Images

Your car needs to be checked every year to make sure it's not a danger to yourself or others. Why shouldn't the person handling your money get the same treatment?

In most states, automobiles must be inspected annually to make sure they meet minimum safety standards. This inspection is typically paid by the car owner. And while these inspections may not catch all vehicle problems, they help prevent cars with a range of safety violations from getting back on the road. That provides significant benefits, including peace of mind, to the driving public

Now imagine if cars were inspected on average only once every 11 years and that 40% of cars never get inspected. Would that affect your confidence to drive in your city? How wary would you now be of the car next to you? Would you consider changing to public transportation to avoid other cars on the road? My suspicion is that many of us would change our driving habits to one degree or another. I myself am not sure I’d feel comfortable driving at all.

This, unfortunately, is the situation with investment advisers: They’re inspected or audited on average only once every 11 years, and 40% have never been audited at all.

Do you think that if this information were widely known by the public, consumers would have less confidence in investment advisers? I think they would. Let’s say you’re an investment adviser: Could that impact your own practice, even if you play by all the rules? I think it could.

The management of life savings is a very personal and emotional decision for many investors. An effective investment adviser listens very carefully to a client’s personal situation, crafts a customized investment policy statement for that client, and then abides by this directive to manage the client’s portfolio by executing it and monitoring it to make sure the client is well served. The media has reported widely over the years on egregious cases in which investors have been taken advantage of by investment advisers who clearly were not placing their client’s interest first.

The Securities and Exchange Commission, which is primarily charged with examining investment advisers, has its hands full. Even with the best of intentions, the SEC cannot always perform examinations with the regularity that it wants to. Funding issues are no doubt part of the problem.

To better serve the public, shouldn’t we making sure that checks and balances are adhered to and to monitor this by doing more regular examinations of investment advisory practices?

Is there a better way to ensure that the frequency of an examinations goes up to the point where all investment advisers are audited at least every three or four years?

Perhaps, similar to the requirement that cars be inspected once a year, investment advisers should pay a nominal user fee that is dedicated to regular examinations of those registered by the SEC. It’s difficult for us advisers to argue against this concept, because we’re the ones who benefit from the privilege to be able to work in this profession — just like people benefit from the privilege of driving on a road with a reasonable degree of safety.

There is a bill already before the U.S. House of Representatives (H.R. 1627) that supports this approach and has bipartisan support. This bill has wide industry support, too, from organizations including: AARP, Consumer Federation of America, Certified Financial Planner Board of Standards, Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors, and the North American Securities Administrators Association.

So while it’s true that such an approach should probably have been adopted years ago, we have a notable opportunity to move this trajectory in a positive direction. If we succeed, the public is better protected and served, and we all as investment advisers can benefit from greater confidence in us and in the work we do.

———-

Stuart Armstrong, CFP, is a member of the Financial Planning Association Board of Directors.

MONEY mutual funds

Why Your Money Is Still Not Safe Enough in Money Funds

The Securities and Exchange Commission's new rules to keep share prices stable help pros more than retail investors.

The law of unintended consequences often comes into play when regulations get too complex. Take the Securities and Exchange Commission’s new rules to reduce the risk of runs on money-market mutual funds.

A money fund is a strange animal. Unlike other mutual funds whose share prices rise and fall along with the value of their assets, a money fund is designed to act like a bank account: Every dollar you put in buys a share, and you’re supposed to be able to take out your money at least dollar for dollar no matter what happens in the market. For that reason, money funds typically hold safe, short-term investments.

Still, sometimes losses in a money fund’s underlying assets make each share worth less than a dollar. When that happens, a sponsor must fork over its own money to prop up the fund (as has happened many times) or it can “break the buck” and stick investors with a sudden, unexpected loss.

This unique structure gives investors a strong incentive to pull money out at the first sign of trouble. They can get their dollar while imposing even bigger losses on those left behind. (If they stay, they risk others imposing losses on them.) So they run. That happened during the 2008 financial crisis, when a large money fund broke the buck and triggered massive runs that stopped only when taxpayers stepped in with a bailout.

RACE TO THE BOTTOM

In response, the SEC could have required all money funds to act like other mutual funds and pay out only what their shares were actually worth. Or the agency could have let money funds keep a stable value only if fund sponsors backed it up with their own capital. Instead, faced with intense industry lobbying, the SEC has split the baby. Effective October 2016, money funds used by big institutions will have floating share values. Retail funds can maintain their $1 per share price, but they won’t have to commit capital to support the buck. Rather, the SEC decided to discourage runs by letting fund sponsors deny investors access to their money for up to 10 days or charge them a fee of as much as 2% to redeem their shares should assets fall precipitously. (This while the average money fund yields, well, almost nothing.)

To its credit, the SEC also mandated better disclosure, including daily publication of the market value of funds’ underlying assets. Alas, here comes the law of unintended consequences: Better information also increases the risk of runs because sophisticated holders will bail out before gates or fees are imposed if the value of a fund’s assets are falling.

So protect yourself, and if you need ready access to your money, keep it in an FDIC-insured bank account or use a good financial website to find a fund investing only in short-term government securities that carry almost zero risk of default. Safety first.

Sheila Bair is former chairman of the Federal Deposit Insurance Corp.

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