On Dec. 15, 2021, the Securities and Exchange Commission (SEC) voted to propose amendments to certain rules governing money market funds under the Investment Company Act of 1940 (the 1940 Act). The SEC indicated that the proposed amendments aim to address concerns about prime and tax-exempt money market funds highlighted by events in March 2020 where investors reallocated substantial amounts of assets into cash and short-term government securities, which led to significant outflows from prime and tax-exempt money market funds.
The proposed amendments would, among other things, increase liquidity requirements for money market funds, to provide a more substantial liquidity buffer in the event of rapid redemptions. Additionally, the proposed amendments would remove provisions of current rules permitting or requiring money market funds to impose liquidity fees or suspend redemptions using gates when a fund's liquidity drops below a certain threshold. The proposal would further require institutional prime and tax-exempt money market funds to implement swing pricing policies and procedures that would reallocate certain liquidity costs to redeeming investors. Additionally, the proposals would amend certain reporting requirements to improve availability of information about money market funds and enhance the SEC's monitoring and analysis of such funds.
Changes to Portfolio Liquidity Requirements
Rule 2a-7 currently requires a money market fund to hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets immediately after acquisition of an asset. The proposal would increase the daily and weekly liquid asset requirements to 25% and 50% of a fund's total assets, respectively.
Removal of Liquidity Fees and Redemption Gates
Under current Rule 2a-7, a money market fund has the ability to impose liquidity fees or redemption gates after crossing a specified liquidity threshold. Generally, a money market fund may impose a liquidity fee of up to 2%, or temporarily suspend redemptions for up to 10 business days in a 90-day period, if the fund's weekly liquid assets fall below 30% of its total assets and the fund's board of directors determines the imposition of fees or gates is in the fund's best interests.
The proposals would eliminate the fee and gate provisions from Rule 2a-7. Under the proposed amendments, a money market fund would still be able to suspend redemptions to facilitate an orderly liquidation of the fund under Rule 22e-3.
Addition of Swing Pricing Requirement
The SEC further proposes a swing pricing requirement specifically for institutional prime and tax-exempt money market funds that would apply when a fund experiences net redemptions. Swing pricing is a process of adjusting a fund's current NAV such that the transaction price effectively passes on costs stemming from shareholder transaction flows out of the fund to shareholders associated with that activity. Currently, trading costs and costs of depleting a fund's daily or weekly liquid assets are borne by the remaining investors in a money market fund. The proposed amendments require an institutional fund to adjust its current NAV per share by a swing pricing factor reflecting spread and transaction costs, as applicable, if the fund has net redemptions for the pricing period (the period of time in which an order to purchase or sell securities of the fund must be received to be priced at the next computed NAV).
Changes to Reporting Requirements
The proposals also include amendments to disclosure Form N-CR and Form N-MFP. Form N-CR is required to be filed by money market funds if certain extraordinary events occur. The proposal adds a new requirement for a fund to report on Form N-CR within one business day of when the fund falls below a specified liquidity threshold (i.e., when the fund has invested less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets). Form N-MFP is used by money market funds to report their portfolio holdings and other key information on a monthly basis. The proposals would add information to these reports regarding the composition and concentration of fund shareholders, the amount of portfolio securities a prime money market fund sold or disposed of during the reporting period, and the number of times the fund applied a swing pricing factor over the course of the reporting period (and the swing factor applied).
Other Proposed Amendments
The proposals would also require stable NAV funds to convert to a floating share price if future market conditions result in negative fund yields and standardize calculations of "dollar-weighted average portfolio maturity."
The SEC will publish the proposed amendments in the Federal Register and has solicited comments on the proposed amendments, asking a number of questions related to each amendment in the full text of the proposed rule. The comment period remains open for 60 days after the date of publication in the Federal Register.
The full text of the proposing release may be found here: https://www.sec.gov/rules/proposed/2021/ic-34441.pdf.
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