On July 23, 2014, the SEC adopted far-reaching amendments to the regulation of U.S. money market funds. See Securities Act Release No. 33-9616.
The purpose of these reforms is stated to be:
to address money market funds’ susceptibility to heavy redemptions in times of stress, improve their ability to manage and mitigate potential contagion from such redemptions and increase the transparency of their risks, while preserving, as much as possible their benefits.
The principal changes are:
- Permits money market funds (which, by definition, excludes government money market funds) to impose liquidity fees and redemption gates in certain circumstances. The amendments permit the funds to impose liquidity fees of up to 2% (“fees”), or temporarily suspend redemptions (“gates”) 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 (including a majority of its independent directors) determines that imposing a fee or gate is in the fund’s best interests.
- A 1% liquidity fee on redemptions is required to be implemented if weekly liquid assets fall below 10% of total assets, unless the board determines that imposing the fee would not be in the best interests of the fund.
- Institutional prime funds (which excludes government securities and retail money market funds) will be required to have a floating net asset value requiring these funds to price and transact in their shares at market-based value, rather than at a $1.00 stable price (‘floating NAV”). The price will be required to be rounded to four decimal places.
- The fees and gates and floating NAV reforms will not apply to government money market funds, which are defined as a money market fund that invests at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are “collateralized fully” by cash or U.S. government securities.
- The fees and gates reform does apply to retail money market funds, but the floating NAV reform does not. A retail money market fund is one that has policies and procedures reasonably designed to limit all beneficial owners to natural persons. Funds will need to adopt procedures for this purpose, including procedures to make this determination for omnibus accounts.
- Both the fees and gates and floating NAV reforms will apply to municipal money market funds (i.e., tax-exempt funds), subject to the possible application of the exception for retail money market funds in respect of the floating NAV reform.
- Notwithstanding the foregoing, funds may use the amortized cost method, which has underpinned the establishment of a stable NAV to value debt securities with remaining maturities of 60 days or less if fund directors, in good faith, determine that the fair value of the debt securities is their amortized cost, unless the particular circumstances warrant otherwise. Additional guidance is provided on the making of this fair value determination.
- Mutual fund disclosure statement requirements have been enhanced to reflect these changes. Web site disclosure regarding liquidity levels, shareholder flows, market-based NAV per share, imposition of fees and gates, and any use of affiliate sponsor support is also required.
- Reforms to the current stress testing requirements have been adopted that will require funds periodically to test their ability to maintain liquid assets of at least 10% and to minimize principal violability in response to hypothetical events that include (i) increases in the level of short-term interest rates, (ii) downgrades or defaults, and (iii) widening of spreads, each in combination with various increases in shareholder redemptions. The fund adviser must report on the results to the board of the fund.
- The compliance date for the floating NAV and liquidity fees and gates amendments is deferred for two years. The other requirements come into effect in 18 months.
- Portfolio diversification requirements have been strengthened, including in respect of investments in affiliated issuers and for guarantors.
Two SEC Commissioners dissented on the adoption of the rule, Michael Piwowar primarily because of opposition to the floating NAV requirement as being ineffective to deter runs, and Kara Stein primarily because of her view that the fees and gates requirement may accelerate runs as liquidity issues arise before these measures are triggered.