February 28, 2024
The Securities and Exchange Commission, by a vote of 3 to 2, approved significant changes to Rule 2a-7 and other rules that govern money market funds under the Investment Company Act of 1940 (“Amendments”) on July 12, 2023.
Among other things, the SEC:
- adopted a new mandatory liquidity fee framework under Rule 2a-7 for institutional prime and institutional tax-exempt money market funds in lieu of the proposed swing pricing framework;
- removed the redemption gate framework from Rule 2a-7, while preserving the discretion to impose liquidity fees for non-government money market funds (without regard to weekly liquid asset levels);
- substantially increased the required minimum levels of daily and weekly liquid assets for all money market funds;
- enabled stable net asset value (NAV) money market funds to institute a reverse distribution mechanism (RDM) or similar “share cancellation” mechanisms during a negative interest rate environment to maintain a stable $1.00 NAV per share; and
- enhanced the reporting requirements of registered money market funds on Form N-MFP as well as SEC-registered investment advisers to private liquidity funds on Form PF.
The Amendments represent the most notable effort by the SEC to reform the money market fund industry since the series of reforms it adopted following the 2007-08 financial crisis. The SEC originally proposed the current reforms in December 2021 (“Proposal”) in response to the stresses in the broader short-term funding markets and substantial redemptions, primarily from institutional prime money market funds at the onset of the COVID-19 pandemic in March 2020. Adopting money market fund reform became a more significant policy priority for financial regulators—both within and outside of the SEC—following the stresses in the banking sector in early 2023 that led to three regional bank failures.
Similar to the reforms following the 2007-08 financial crisis, the Amendments attempt to respond to significant market events and reflect the SEC’s understanding of the roles of money market funds in the short-term funding markets and perception of their vulnerabilities during periods of market stress. In his opening remarks, SEC Chair Gary Gensler stated that the Amendments “will make money market funds more resilient, liquid, and transparent, including in times of stress.” Commissioners Hester M. Peirce and Mark T. Uyeda, who voted against the Amendments, expressed their disapproval of several aspects of the Amendments, including the mandatory liquidity fee framework, and suggested that the framework should have been re-proposed for additional public comment.
The SEC did not adopt elements of the Proposal that were most concerning to the industry, namely mandatory swing pricing for institutional money market funds and a requirement for stable NAV money market funds to determine that their intermediaries are able to support a floating NAV. However, certain elements of the Amendments will likely increase costs to fund sponsors and have commercial implications for institutional money market funds that strike their NAVs at multiple times per day and/or offer same-day settlement. The Amendments also raise potential issues for money market fund boards of directors, service providers, intermediaries, and investors. The SEC’s decision not to adopt the proposed swing pricing framework may also be a preview for a proposed rule that would require registered open-end funds (other than ETFs) to utilize swing pricing. For example, in the Adopting Release, the SEC acknowledged the operational burdens associated with swing pricing (as highlighted by many fund sponsors that commented on the Proposal) and asserted that liquidity fees would still achieve “many of the benefits [the SEC was] seeking with swing pricing by allocating liquidity costs to redeeming investors in stressed periods.” This pivot may suggest flexibility in the SEC’s preference among potential anti-dilution mechanisms in the separate proposed swing pricing rulemaking for registered open-end funds (other than ETFs), though the Adopting Release conceded no ground with respect to the perceived need for an anti-dilution mechanism.
The Amendments became effective on October 2, 2023 (“Effective Date”), except for the amendments to Forms N-MFP, N-CR and PF. The compliance date for: (i) the mandatory liquidity fee framework will be October 2, 2024; and (ii) the discretionary liquidity fee framework, the increased minimum liquidity requirements and the calculation specifications for weighted average maturity and weighted average life will be April 2, 2024, although, in each case, money market funds may choose to rely on those aspects of the Amendments at any point following the Effective Date. The effective and compliance date for the amendments to Forms N-MFP, N-CR and PF is June 11, 2024.
The full article in its original form can be found here.
Devon Roberson (LAW ’19) is an Associate at Dechert where he focuses his practice on mutual funds, investment advisers, banking and financial institutions, and broker-dealer matters.