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Financial markets

SEC Proposes Amendments to Money Market Fund Rules to Enhance Liquidity and Stability

Strategic Insights

— 2 min read

The Securities and Exchange Commission (SEC) has voted to propose amendments to Rule 2a-7, which governs money market funds, and other related rules under the Investment Company Act of 1940. The proposed amendments aim to address concerns about prime and tax-exempt money market funds that were highlighted by market events in March 2020. The SEC is seeking comments on the proposed amendments until 60 days following their publication in the Federal Register. If adopted, the amendments would eliminate the liquidity fee and redemption gate provisions, increase the minimum daily and weekly liquid asset requirements, and expand the obligations of government and retail money market funds.

Key Takeaways:

  • The SEC proposes to eliminate the liquidity fee and redemption gate provisions of Rule 2a-7.
  • Institutional prime and institutional tax-exempt money market funds would be required to implement swing pricing policies and procedures to adjust a fund's current net asset value (NAV) per share by a swing factor when the fund has net redemptions.
  • The minimum daily liquid asset and weekly liquid asset requirements would be increased from 10% and 30% to 25% and 50%, respectively.
  • Government and retail money market funds' obligations would be expanded to confirm that they can fulfill shareholder transactions if they convert to a "floating" share price.
  • Money market funds would be required to specify how they calculate weighted average maturity and weighted average life.
  • Certain disclosure requirements on Forms N-CR, N-MFP, and N-1A would be amended.
  • Prime money market funds hold a variety of taxable short-term obligations, while tax-exempt money market funds primarily hold obligations of state and local governments.
  • Government money market funds hold obligations of the U.S. Government and its agencies.
  • The 2014 amendments to Rule 2a-7 provided boards of prime and tax-exempt money market funds with the ability to impose liquidity fees and/or redemption gates.
  • The 2020 market events led to a report by the President's Working Group on Financial Markets, which discussed potential money market fund reform options.
  • The SEC subsequently issued a request for comment on the various reforms discussed in the report.

Statistics:

  • 3-2 vote by the SEC to propose amendments to Rule 2a-7 and other related rules.
  • 60-day comment period for proposed amendments.
  • 10% and 30% minimum daily and weekly liquid asset requirements to be increased to 25% and 50%, respectively.
  • 7-8% of prime money market funds' assets to be allocated to taxable short-term obligations.
  • 85% of tax-exempt money market funds' assets to be allocated to obligations of state and local governments.
  • 5% of government money market funds' assets to be allocated to obligations of the U.S. Government and its agencies.

Sources:

  • Money Market Fund Reforms, 1940 Act Release No. 34441 (Dec. 15, 2021)
  • SEC Proposes Amendments to Money Market Fund Rules, SEC Press Release No. 2021-258 (Dec. 15, 2021)
  • Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds), 1940 Act Release No. 13380 (July 18, 1983)
  • Money Market Fund Reform, 1940 Act Release No. 29132 (Mar. 4, 2010)
  • Money Market Fund Reform; Amendments to Form PF, 1940 Act Release No. 31166 (Aug. 14, 2014)

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