Money Market Fund Reforms
By Ina Bendaj, Senior, Assurance Services
Money market funds play a pivotal role in the financial markets, offering investors a safe and liquid way to park their cash while earning modest returns. They invest in short-term, high-quality securities such as Treasury bills and commercial paper, making them a popular choice for investors seeking both safety and liquidity. In March 2020, economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. Prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets.
On July 12, 2023, the SEC issued a release adopting rule and form amendments concerning money market funds under the 1940 Act1. The amendments are intended to address problems experienced by certain money market funds in connection with the economic shock at the onset of the COVID-19 pandemic.
The amendments are designed to improve the resilience and transparency of money market funds by:
- Increasing minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions
- Removing provisions from the current rule that permit a money fund to temporarily suspend redemptions and removing the regulatory tie between the imposition of liquidity fees and a fund’s liquidity level
- Requiring certain money market funds to implement a liquidity fee and a framework that will better allocate the costs of providing liquidity to redeeming investors and
- Enhancing certain reporting requirements to improve the Commission’s ability to monitor and assess money market fund data.
The main changes effected by the Release on July 12, 2023 are listed below:
Increase of the Minimum Daily and Weekly Liquidity Requirements
The amendments will increase the minimum liquidity requirements for money market funds to at least 25 percent of a fund’s total assets in daily liquid assets and at least 50 percent of a fund’s total assets in weekly liquid assets. These amendments will provide a more substantial buffer to better equip money market funds to manage significant and rapid investor redemptions in stressed market conditions while maintaining funds’ flexibility to invest in diverse assets during normal market conditions.
Elimination of Redemption Gates
The amendments will remove money market funds’ ability to impose temporary gates to suspend redemptions. They will also remove the regulatory tie that permits money market funds to charge liquidity fees if their weekly liquid assets fall below a certain threshold. These changes will reduce the risk of investor runs on money market funds during periods of market stress.
Liquidity Fee Requirement
The amendments will require institutional prime and institutional tax-exempt money market funds to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets unless the fund’s liquidity costs are de minimis. In addition, non-government money market funds must impose a discretionary liquidity fee if the fund’s board (or its delegate) determines that a fee is in the fund’s best interest. The amended liquidity fee framework is designed to protect remaining shareholders from dilution and to allocate costs more fairly so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.
Under the amendments, retail and government money market funds may handle a negative interest rate environment either by converting from a stable share price to a floating share price or by reducing the number of shares outstanding to maintain a stable net asset value per share, subject to certain board determinations and disclosures to investors. The amendments will also modify certain reporting forms to reflect the amendments to the regulatory framework for money market funds. Changing the reporting requirements will improve transparency and facilitate Commission monitoring of money market funds. In addition, the Commission adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to require additional information regarding the liquidity funds they advise that is generally aligned with the amended reporting for money market funds. The Commission proposed these amendments in January 2022.
The rule amendments will become effective 60 days after publication in the Federal Register. The reporting form amendments will become effective June 11, 2024. The Commission is adopting a tiered approach to the transition periods for the other final amendments. The Commission has provided a six-month transition period for funds to comply with certain amendments, including the minimum portfolio liquidity requirements and the discretionary liquidity fee provision. Funds will have twelve months after the effective date to comply with the amended rule’s mandatory liquidity fee provision.
- “SEC.gov | SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers.” www.sec.gov, www.sec.gov/news/press-release/2023-129. Accessed 21 Sept. 2023.