UPDATE 1-U.S. prime fund assets fall after money market reform

(Updates with details, background)

NEW YORK, Oct 19 (Reuters) - U.S. prime money market fund assets fell in the latest week after new industry regulations on share prices and redemption fees and limits went into effect Friday, the Money Fund Report said on Wednesday.

Prime fund assets for institutional investors fell by $34.22 billion to $131.27 billion in the week ended Oct. 18, while institutional government-only fund assets rose by $21.9 billion to $1.57 trillion, according to the report, published by iMoneyNet.

Money fund operators switched many of their institutional prime funds into ones that own only government securities in an effort to be exempt from new rules from the Securities and Exchange Commission.

Meanwhile, corporate treasurers and other cash investors have pulled money from prime funds, which they had used as an alternative to bank accounts, because they dislike the imposition of floating share prices and redemption limits and fees during periods of market turbulence.

These SEC rules are aimed to safeguard the sector from the market turbulence such as that seen after the collapse of Lehman Brothers during the global credit crisis eight years ago.

Since last October, total prime fund assets have fallen by more than $1 trillion. This has reduced demand for short-term debt issued by companies, raising their borrowing costs.

Retail prime fund assets grew $968.9 million to $251.09 billion, while retail government-only fund assets gained $3.85 billion to $516.32 billion in the latest week.

Meanwhile, tax-free money funds recorded a weekly increase in assets for the first time since the week of March 7, iMoneyNet said.

The new SEC rules also applied to some tax-free funds, spurring outflows from them.

Tax-free funds collectively reported inflows of $290.6 million, led by a $5.17 billion rise in national retail tax-free fund assets. That was offset by a $4.8 billion drop among other types of tax-free funds.

All money funds, tracked by iMoneyNet, lost $7.22 billion in assets to $2.597 trillion in latest week. (Reporting by Richard Leong; Editing by Chris Reese)

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