Reserve Primary Fund
| Company type | Mutual fund |
|---|---|
| Industry | Financial services |
| Founded | 1970 |
| Founder | Bruce R. Bent, Henry B. R. Brown |
| Defunct | 2015 |
| Fate | Dissolved after financial losses during 2008 crisis |
| Products | Money market fund |
The Reserve Primary Fund holds the distinction of being the first-ever money market fund, established in 1970 by Bruce R. Bent and Henry B. R. Brown under the management of Reserve Management Company. At its height, the fund managed assets exceeding $60 billion. However, during the 2008 financial crisis, it experienced a loss in net asset value, commonly referred to as "breaking the buck," which ultimately led to its dissolution.
Origin
Prior to 1980, Federal Reserve Regulation Q imposed a ceiling of 5 percent on interest rates for bank savings accounts, a restriction dating back to the Great Depression. When inflation reached 5 percent in 1969, investors began searching for alternatives that offered superior returns. Although instruments such as Treasury bills and jumbo certificates of deposit yielded market-based interest rates, they required substantial minimum investments and provided less liquidity. Identifying a profitable opportunity, Bent and Brown created the Reserve Fund to aggregate investments solely in these types of securities. Subsequently, by 1986, Congress removed most caps on interest rates.
Failure
Starting in 2006, Reserve Primary shifted its strategy to include commercial paper, an asset type previously avoided by Bent. By early 2008, commercial paper linked to asset-backed securities and the financial sector accounted for 56% of the fund’s portfolio. The collapse of Lehman Brothers on September 15, 2008 intensified concerns due to the fund’s holdings of Lehman-issued paper (representing 1.2% of assets) along with other financial-sector exposures. Unlike many other money market funds, Reserve Primary did not have a parent company backing its share price, rendering it particularly susceptible to risk. As investors rushed to redeem shares before losses deepened, redemption requests surpassed half of the fund’s assets. Unable to liquidate holdings promptly, the fund declared these assets worthless and adjusted its share price to $0.97. This event sparked widespread runs on other money market funds, prompting intervention from the U.S. Treasury, which temporarily suspended redemptions and guaranteed share prices. By the end of that month, management announced plans for liquidation.
The Securities and Exchange Commission (SEC) filed suit against Reserve Management and its executives for providing false assurances about preserving the fund’s value. A federal court imposed a $750,000 penalty on the SEC’s behalf, characterizing the misconduct as an isolated episode under extraordinary circumstances unlikely to recur. Additionally, a class action lawsuit brought by investors resulted in a $54 million settlement.
The fund was officially dissolved in December 2015 after distributing $0.991 per share back to investors.