On July 12, the SEC adopted the proposed amendments to rule 2a-7 (which was proposed during December 2021) and other rules governing money market funds under the Investment Company Act of 1940. These rules seek to address concerns regarding redemption costs and liquidity of money market funds by improving resiliency and transparency in reporting.
The original proposal of the rule was in response to the stress that the COVID-19 pandemic caused to the financial markets. During March 2020, money market funds saw liquidity concerns as significant outflows occurred which in turn resulted in the need for government intervention in the form of the Money Market Fund Liquidity Facility (“MMLF”). The MMLF provided liquidity to money market funds in the form of loans made to financial institutions to purchase qualified assets from money market funds in need of liquidity. At its peak, the MMLF program reached just over $50 billion or approximately 5% of net assets in prime and tax-exempt money market funds at the time.[1]
The amendments have four key elements: 1) removal of the redemption gate provision, 2) an increase in the minimum daily and weekly asset requirements, 3) the removal of a regulatory tie between a specified liquidity threshold and the ability to impose a discretionary liquidity fee with respect to any non-government money market fund, and 4) a new mandatory liquidity fee requirement for institutional prime and tax-exempt money market funds.[2]
Removal of the Redemption Gate Provision
This amendment removes the ability for money market funds to impose a gate on redemptions for up to ten business days if the fund’s weekly liquid assets fall below 30% of its total assets. The belief is that this will reduce the risk of investors runs during periods of market stress.
Minimum Liquidity Requirements
The rule was amended to require money market funds to hold a minimum of 25% daily liquid assets and 50% weekly liquid assets up from the previous threshold of 10% and 30% respectively
The SEC believes these levels will allow managers to manage liquidity risk during periods of market stress.
Removal of the Ability to Charge Liquidity Fees Based on Threshold
The rule was amended to remove the ability of a money market fund to impose liquidity fees if their weekly liquid assets fall below a certain threshold and implemented a framework for both mandatory and discretionary liquidity fees.
Liquidity Fee Requirement
Prime and tax-exempt money market funds are now required to impose a mandatory liquidity fee when net redemptions exceed 5% of net assets. These fees are not required when liquidity costs are less than one basis point. The goal of this amendment is to ensure that costs resulting from redemptions in stressed market conditions are more fairly allocated to redeeming investors.
In addition to the above key amendments, the SEC also amended reporting requirements for section 3 of Form PF for SEC-registered investment advisers to large liquidity funds (greater than $1 billion in assets). The amendments require these advisers to report substantially the same information that money market funds report on Form N-MFP which includes fund operational information, portfolio holdings, financing, investor information and a new item concerning disposition of securities.
The amendments will become effective 60 days after publication in the Federal Register. The amendments to Form PF are effective June 11, 2024. There is a six-month transition period for fund to comply with certain amendments and twelve months to comply with the mandatory liquidity provision.
[1] https://www.sec.gov/files/rules/final/2023/33-11211.pdf
[2] https://www.sec.gov/news/statement/uyeda-final-money-market-fund-reforms-07-12-2023
