U.S. securities regulators are considering tough new rules for money market funds to help avoid a repeat of what happened when the collapse of the Reserve Primary Fund wreaked havoc on the $3.67 trillion market.

The Securities and Exchange Commission met on Wednesday to consider a proposal that would prohibit money market funds from buying illiquid securities and requiring them to hold at least 5 percent in liquid securities.

The proposal needs approval from a majority of the five SEC commissioners for it to move forward. The vote is expected later on Wednesday.

Money market funds were long considered as safe as cash until the collapse of Lehman Brothers Holdings last fall pushed the value of the Reserve Fund below $1 a share, forcing the creation of a government program to backstop the market.

Until last fall, few investors had concerns about investing in money market funds, said Andrew Donohue, the SEC's investment management director.

The SEC is considering shortening the average maturity of debt that money market funds can hold to 60 days from the current 90 days. Retail money market funds would have to hold at least 5 percent of their assets in cash, U.S. Treasury securities or other cash equivalents.

Institutional funds, which experienced greater liquidity challenges, would have to hold at least 10 percent of their assets in liquid securities.

The SEC is also considering only allowing a fund to invest in the highest-quality securities.

Overall, the new rules would boost the funds' liquidity and help ensure investors can get their money out of a fund, if they choose.

Other proposals under consideration include periodic stress tests and allowing a fund's board of directors to suspend redemptions in extraordinary circumstances.

(Reporting by Rachelle Younglai, editing by Gerald E. McCormick and Lisa Von Ahn)

Investment