July 12, 2023

SEC Finalizes Amendments to Money Market Fund Rules

The SEC adopted amendments to ICA Rule 2a-7 ("Money Market Funds") aimed at preventing runs on money market funds during times of financial stress.

The amendments will:

  • remove from the existing money market funds rule the authority of funds to impose gates on redemption and liquidity fees on redeeming investors if weekly liquid assets fall below a certain threshold;
  • increase the amount of assets with daily liquidity that a money market fund must hold from 10 percent to 25 percent of its assets and increase the amount of assets with weekly liquidity that a money market fund must hold from 30 percent to 50 percent of its assets;
  • add provisions that specify how funds must calculate weighted average maturity and weighted average life;
  • modify certain reporting requirements on Forms N-MFP and N-CR to improve the availability of money market fund information, and making conforming changes to Form N-1A to reflect the changes to the regulatory framework for these funds; and
  • update Form PF to require large liquidity fund advisers to provide additional information regarding the liquidity funds they advise.

In response to feedback on the proposed amendments (see previous coverage), the SEC will not adopt swing pricing requirements and will instead modify the current liquidity fee framework to (i) require institutional prime and institutional tax-exempt money market funds to impose a liquidity fee when net redemptions exceed 5 percent of net assets and (ii) permit any non-government money market fund to impose a liquidity fee if the board determines it is in the best interest of the fund. The SEC also modified the original proposal to allow retail and government money market funds to permit funds to cancel shares in a negative interest rate environment, subject to certain conditions.

The rule amendments and amendments to Forms N-1A and N-CSR will go into effect 60 days following publication in the Federal Register and the amendments to Forms N-CR, N-MFP, and PF will go into effect on June 11, 2024.

SEC Commissioner Statements

  • SEC Chair Gary Gensler. Mr. Gensler asserted that the amendments will enhance money market funds’ liquidity and transparency by (i) increasing minimum liquidity requirements, (ii) preventing money market funds from temporarily halting redemptions, which he noted may have encouraged runs in March 2020 and (iii) implementing liquidity fees to ensure that during periods of financial stress, redeeming investors, instead of remaining investors, bear the cost of redemptions.
  • SEC Commissioner Hester M. Peirce. While in favor of several aspects of the final rule, including the removal of the redemption gate provision and the provision regarding swing pricing, Ms. Peirce criticized the final rule for its "regulatory, one-size-fits-all" approach to mandatory liquidity fees. She stated that the final rule commits the same error as a similar rulemaking in 2014 — an assumption by the SEC that "[its] own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders."
  • SEC Commissioner Mark T. Uyeda. Mr. Uyeda warned that the SEC is "poised to repeat errors of the past" with its inclusion of a "previously undisclosed mandatory liquidity fee." He expressed concern that the mandatory liquidity fee could exacerbate runs during times of stress.
  • SEC Commissioner Caroline A. Crenshaw. Ms. Crenshaw expressed "cautious optimism" that the amendments will increase money market funds’ resilience during periods of economic stress.
  • SEC Commissioner Jaime Lizárraga. Mr. Lizárraga commended the final rule for addressing the failings of previous reforms after money market funds experienced runs in March of 2020. He supported the rule’s (i) increase to funds’ liquidity requirements to help reduce transaction costs of redemptions and (ii) liquidity fee framework to shift costs to redeeming investors.