At a meeting held on July 23, 2014, the SEC voted 3-2 to adopt amendments (the “Amendments”) to various regulatory requirements affecting money market funds (“MMFs”). The Amendments, which are set forth in SEC Release No. IC‑31166 (the “Release”), focus primarily on Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”), the principal rule that governs MMFs. As summarized in the June 11, 2013 Financial Services Alert, the SEC initially proposed certain amendments to the regulation of MMFs on June 5, 2013 (the “Proposals”). The Amendments make a number of significant changes to the MMF regulatory framework, certain of which reflect differences from the Proposals. In particular, the Amendments (i) require certain MMFs to use a floating net asset value (“NAV”) as opposed to allowing such MMFs to maintain a stable share price through use of the amortized cost method of valuation and/or the penny rounding method of pricing, (ii) introduce mechanisms for MMFs to impose liquidity fees and temporarily suspend redemptions, and (iii) require further diversification of MMF portfolios, amend MMF stress testing requirements, and add new reporting and disclosure requirements for MMFs. In conjunction with adopting the Amendments, the SEC approved the issuance for public comment of proposals to further amend the MMF regulatory regime (the “Companion Proposals”).
This article provides a brief summary of the Amendments and the Companion Proposals.
Overview of the Amendments
Under the Amendments, rather than using the amortized cost method to maintain a stable $1.00 NAV, a non-government institutional MMF must use a “floating” NAV calculated based on the current market-based value of the securities in its portfolio rounded to the fourth decimal place (e.g., $1.0000). However, the SEC stated that a floating NAV MMF would be able to use amortized cost valuation to the same extent that other non-money market mutual funds are able to do so (i.e., where the fund’s board of directors determines, in good faith, that the fair value of debt securities with remaining maturities of 60 days or less is their amortized cost, unless the particular circumstances warrant otherwise).
“Retail” MMFs and “government” MMFs are exempt from the floating NAV requirement.
- A “retail” MMF is a MMF that adopts and implements policies and procedures reasonably designed to limit beneficial owners to natural persons.
- A “government” MMF is a MMF that invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements collateralized by cash or government securities.
Liquidity Fees and Gates
The Amendments provide the board of directors of a non-government MMF with (a) the discretion to impose a “liquidity fee” of no more than 2% on redemption amounts if the MMF’s “weekly liquid assets,” as defined under Rule 2a-7, fall below the required regulatory threshold of 30% of total assets and (b) the discretion to suspend redemptions temporarily for up to 10 business days in a 90-day period (i.e., to “gate” the MMF) under the same circumstances. In addition, the Amendments require all non‑government MMFs to impose a liquidity fee of 1% if the MMF’s weekly liquid assets fall below 10% of total assets, unless the MMF’s board of directors determines that imposing such a fee is not in the best interests of the MMF (or that a different fee no greater than 2% is in the MMF’s best interests).
Diversification, Disclosure and Stress Testing
Under the Amendments, MMFs will be subject to increased diversification requirements. The Amendments add to the reporting requirements under existing Form N-MFP and impose new requirements to disclose certain information on MMF websites and report to the SEC on new Form N-CR following the occurrence of certain significant events such as portfolio security defaults or the imposition or removal of a liquidity fee or gate. The Amendments enhance existing stress testing obligations for MMFs by requiring them to periodically test their ability to maintain weekly liquid assets of at least 10% and to minimize principal volatility in response to specified hypothetical events. Finally, the Amendments revise Form PF reporting for “large liquidity fund advisers” (i.e., registered advisers with at least $1 billion in combined MMF and liquidity fund assets) to require that they report virtually the same information with respect to their liquidity funds’ portfolio holdings on Form PF as MMFs are required to file on Form N-MFP.
The Amendments are effective 60 days after the publication of the Release in the Federal Register (the “Effective Date”). The compliance date for the Amendments related to liquidity fees and gates and floating NAV, including any related amendments to disclosure, is 2 years after the Effective Date. The compliance date for amendments that are not specifically related to either floating NAV or liquidity fees and gates, including amendments to (i) diversification, (ii) stress testing, (iii) disclosure requirements not specifically related to either floating NAV or liquidity fees and gates, (iv) Form PF, and (v) Form N-MFP, is 18 months after the Effective Date. The compliance date for Form N-CR and related requirements is 9 months after the Effective Date.
In the Companion Proposals, the SEC (i) re-proposed the removal of NRSRO rating references from Rule 2a-7 and Form N-MFP and (ii) proposed exemptive relief from the immediate confirmation delivery requirements of Rule 10b-10 under the Securities Exchange Act of 1934 for transactions in shares of any MMF required to use a floating NAV. Comments on the former proposal will be due 60 days after publication of its formal proposing release in the Federal Register; comments on the latter proposal will be due 21 days after publication of its formal proposing release in the Federal Register.