SEC Adopts Money Market Fund Reforms

Who may be interested: Registered Investment Companies; Investment Advisers, Board of Directors

Quick Take: The SEC recently adopted amendments to Rule 2a-7 under the Investment Company Act to improve the transparency and resiliency of money market funds during times of market stress. The amendments are the SEC’s third attempt to safeguard money market funds in the changing investment environment since the 2008 financial crisis. The SEC added liquidity, credit quality and maturity limits in 2010, and liquidity gates and fees and floating net asset value requirements in 2014. The current amendments retract some of the 2014 rule changes because they did not operate as intended during the market stress in March 2020. Instead, the SEC has made a new effort to transfer to redeeming shareholders certain costs of satisfying redemption requests.

Key aspects of the money market fund amendments are as follows. The Amendments:

• increase the required minimum levels of daily liquid assets and weekly liquid assets to 25% (from 10%) and 50% (from 30%), respectively, as determined at the time of security acquisition;
  
  
• remove a money market fund’s ability to temporarily suspend the ability of investors to redeem their shares (i.e., impose a gate) and eliminate provisions in the current rule that tie a money market fund’s ability to impose liquidity fees to the fund’s level of weekly liquid assets;
  
  
• impose a mandatory liquidity fee framework for institutional prime and institutional tax-exempt funds in lieu of the proposed swing pricing requirement¹ and require such funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5% of the fund’s net assets, unless the liquidity costs are de minimis;
  
  
• retain the discretionary liquidity fee provisions under the current rule, without the above-mentioned tie between such fees and weekly liquid assets, to permit a non-government money market fund to impose a discretionary liquidity fee when the fund’s board, or its delegate, determines that the fee is in the best interests of the fund (Government money market funds are not subject to this provision, but may choose to impose discretionary liquidity fees);
  
  
• remove the 10% weekly liquid assets threshold under current stress testing requirements to instead require a money market fund to determine, and periodically test, the minimum level of liquidity it seeks to maintain during periods of market stress;
  
  
• permit retail and government money market funds to address a negative interest rate environment by reducing the number of shares outstanding to maintain a stable net asset value per share (share cancellation), subject to certain board determinations and disclosures to investors; and
  
  
• enhance existing reporting requirements, including, among others, (i) a new requirement to report publicly on Form N-CR when a fund’s daily or weekly liquid assets decline by more than 50% below the regulatory minimums, and (ii) a requirement to report additional information on Form N-MFP regarding the composition and concentration of money market fund shareholders.

Effective and Compliance Dates

The amendments will be effective 60 days after publication in the Federal Register with tiered compliance dates. The increased minimum liquidity and stress testing requirements and the discretionary liquidity fee framework will have a compliance date six months after the effective date. The mandatory liquidity fee framework will have a compliance date twelve months after the effective date. There is no separate compliance date for the removal of redemption gates, removal of the tie between liquidity fees and liquidity thresholds, and the new provision allowing share cancellation – these amendments will go into effect on the Effective Date. The reporting form amendments will have a delayed effective and compliance date of June 11, 2024.

For more information, Seward & Kissel’s client alert on the amendments is available here.

The adopting release can be found here.

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¹ “Swing pricing” is the process of adjusting a fund’s net asset value per share to pass the costs that arise from the buying or selling of fund shares on to the investors responsible for the activity.