On December 15, 2021, the Securities and Exchange Commission (the "SEC") voted 3-2 to propose amendments to Rule 2a-7 (the rule governing money market funds) and other rules under the Investment Company Act of 1940 (the "1940 Act"), as well as related reporting and disclosure requirements.1 The proposed amendments are the latest chapter in the SEC's history of money market fund reform and are intended by the SEC, in part, to address concerns about prime and tax-exempt money market funds that were highlighted by market events that occurred in March 2020 at the beginning of the COVID-19 pandemic.2 Comments on the proposed amendments may be submitted until 60 days following the publication of the Proposing Release in the Federal Register.

If adopted, the proposed amendments would:

  • Eliminate the liquidity fee and redemption gate provisions of Rule 2a-7;
  • Require institutional prime and institutional tax-exempt money market funds 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;
  • Increase the minimum daily liquid asset and weekly liquid asset requirements from 10% and 30% to 25% and 50%, respectively;
  • Expand government and retail money market funds' obligations to confirm that they can fulfill shareholder transactions if they convert to a "floating" share price (e.g., in the event of a negative interest rate environment);
  • Specify how money market funds calculate weighted average maturity and weighted average life; and
  • Amend certain disclosure requirements on Forms N-CR, N-MFP and N-1A.

Background

The SEC adopted Rule 2a-7 in 1983 and has amended the rule several times over the years, including after the events of the 2008 financial crisis.3 In 2010, the SEC adopted amendments to Rule 2a-7 that, among other things, required money market funds to maintain liquidity buffers in the form of specified minimum levels of daily liquid assets and weekly liquid assets and further limited the average maturity of a fund's portfolio.4 In 2014, the SEC amended Rule 2a-7 to provide boards of non-government money market funds (i.e., prime and tax-exempt money market funds)5 with the ability to impose liquidity fees and/or redemption gates in the event a fund's weekly liquid assets fall below 30%.6 The 2014 amendments also required institutional prime and institutional tax-exempt money market funds to "float" their NAVs (i.e., not fix the NAVs at $1.00 per share).7

In March 2020, institutional prime and tax-exempt money market funds experienced large outflows, which contributed to stress on short-term funding markets.8 The outflows significantly slowed following intervention by the Federal Reserve and the U.S. Treasury, which established the Money Market Mutual Fund Liquidity Facility and other programs to support short-term funding markets.9 The President's Working Group on Financial Markets issued a report discussing these events and several potential money market fund reform options in December 2020 (the "PWG Report").10 The SEC subsequently issued a request for comment on the various reforms discussed in the PWG Report,11 and has now proposed rule amendments based on those comments and potential reform options.

Footnotes

1 See Money Market Fund Reforms, 1940 Act Release No. 34441 (Dec. 15, 2021), here ("Proposing Release").

2 See SEC Proposes Amendments to Money Market Fund Rules, SEC Press Release No. 2021-258 (Dec. 15, 2021), here.

3 See Proposing Release, at 9-12; 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), here.

4 See Money Market Fund Reform, 1940 Act Release No. 29132 (Mar. 4, 2010), here.

5 Prime money market funds hold a variety of taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper. Tax-exempt money market funds primarily hold obligations of state and local governments and their instrumentalities, and pay interest that is generally exempt from federal income tax for individual taxpayers. Government money market funds hold obligations of the U.S. Government, including obligations of the U.S. Treasury and Federal agencies and instrumentalities, as well as repurchase agreements collateralized by government securities. See Proposing Release, at 7-8.

6 See Money Market Fund Reform; Amendments to Form PF, 1940 Act Release No. 31166 (Aug. 14, 2014), here.

7 Within the prime and tax-exempt money market fund categories, some funds are "retail" funds and others are "institutional" funds. Retail money market funds are held only by natural persons, and institutional funds can be held by a wider range of investors, such as corporations, small businesses, and retirement plans. See Proposing Release, at 8.

8 See id. at 14-26.

9 See Federal Reserve and U.S. Treasury Seek to Bolster Money Market Funds (Mar. 23, 2020), here.

10 See Report of the President's Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds (Dec. 2020), https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.

11 See Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report, 1940 Act Release No. 34188 (Feb. 10, 2021), here.

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