SEC proposes changes to money market fund rules Finance & Banking
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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”), and related reporting and disclosure requirements.1 The proposed changes are the latest chapter in the SEC’s money market fund reform story and are intended, in part, to address concerns about investment-grade, tax-exempt money market funds that have been evidenced by the market events that occurred in March 2020 at the start of the COVID-19 pandemic.2 Comments on proposed changes may be submitted up to 60 days after the proposed release is published in the Federal Register.
If adopted, the proposed amendments:
- Eliminate the Liquidity Fee and Redemption Portal provisions of Rule 2a-7;
- Require investment-grade institutional and tax-exempt institutional money market funds to implement swing pricing policies and procedures to adjust a fund’s current net asset value (“NAV”) per share by a factor swing when the fund has net redemptions;
- Increase the minimum daily and weekly liquid asset requirements from 10% and 30% to 25% and 50%, respectively;
- Extend the requirements of public funds and retail money market funds to confirm that they can honor shareholder transactions if they convert at a “floating” share price (for example, in the case of an environment negative interest rates);
- 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.
The SEC adopted Rule 2a-7 in 1983 and has amended it several times over the years, including after the events of the 2008 financial crisis.3 In 2010, the SEC passed amendments to Rule 2a-7 which, 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 cash. wallet.4 In 2014, the SEC amended Rule 2a-7 to provide boards of directors with non-government money market funds (i.e., high-quality, tax-exempt money market funds)5 with the ability to impose liquidity charges and/or redemption gates in the event that a fund’s weekly liquid assets fall below 30%.6 The 2014 amendments also required high-quality, tax-exempt institutional money market funds to float their net asset value (i.e., they do not fix the net asset value at $1.00 per share ).seven
In March 2020, investment-grade and tax-exempt institutional money market funds experienced large capital outflows, which helped to weigh on short-term funding markets.8 Funding outflows have slowed significantly following the intervention of the Federal Reserve and the US Treasury, which implemented the Money Market Mutual Fund Liquidity Facility and other programs to support equity markets. short term financing.9 The President’s Financial Markets Task Force released a report discussing these events and several potential options for money market fund reform in December 2020 (the “PWG Report”).ten The SEC subsequently issued a request for comment on the various reforms discussed in the PWG report,11 and has now proposed changes to the rules based on those comments and potential reform options.
1 See Money Market Fund Reforms, 1940 Act Release No. 34441 (December 15, 2021), here (“Proposing Release”).
2 See SEC Proposes Amendments to Money Market Fund Rules, SEC Press Release No. 2021-258 (December 15, 2021), here.
3 See Proposing Release, p. 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 (March 4, 2010), here.
5 Investment grade money market funds hold a variety of taxable short-term bonds issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper. Tax-exempt money market funds primarily hold state and local government bonds and their instruments, and pay interest that are generally exempt from federal income tax for individual taxpayers. Government money market funds hold US government bonds, including US Treasury and federal agency bonds and instruments, as well as repurchase agreements backed by government securities. See Propose Release, p. 7-8.
6 See Reform of money market funds; Amendments to Form PF, 1940 Act Release No. 31166 (August 14, 2014), here.
7 Within the investment grade and tax-exempt money market fund categories, some funds are “retail” funds and some are “institutional” funds. Retail money market funds are only held by individuals, and institutional funds can be held by a wider range of investors, such as corporations, small businesses and pension plans. See Propose Release, at 8.
8 See id. at 14-26.
9 See Federal Reserve and US Treasury Seek to Strengthen Money Market Funds (March 23, 2020), here.
10 See Report of the President’s Task Force on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds (December 2020), https://home.treasury.gov/system/files/136/PWG- MMF-final-report-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 (February 10, 2021), here.
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