SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers

Following a public consultation on proposed rule changes under the Investment Company Act of 1940 concerning requirements of money market mutual funds (MMFs) as regards liquidity risk management which was launched back in 2021 as a consequence of the liquidity issues many MMFs faced during the onset of the COVID-19 pandemic in March 2020 due to a surge in redemption requests from investors, the U.S. Securities and Exchange Commission (SEC) has now announced the finalization of those changes.
In a corresponding final rule document which will shortly be published in the Federal Register (FR), the SEC outlines the final changes to Statutory Instrument 17 CFR Part 270, a regulation under the Investment Company Act of 1940, as they will be implemented 60 days following the publication in the FR with above noted transitional dates. The final rule document also outlines the feedback the Commission has received to its consultation and briefly discusses subsequent changes that have been made to the draft version to reflect this feedback.
To recall, in 2021 the SEC proposed some significant changes to the requirements of MMFs so as to enhance the resilience of MMFs, protect investors particularly during times of market stress, and enhance monitoring over liquidity risk management practices of MMFs. In brief, the measures suggested by the SEC included – among others:
– an increase of the liquid asset requirements of MMFs.
– the elimination of the option for funds to impose additional liquidity fees when their daily and weekly liquid assets fall below a certain threshold.
– the removal of the redemption gate provisions.
– the introduction of a statutory requirement for certain MMFs to introduce swing pricing policies.
– the modification of several forms to require additional data reporting on swing pricings and to introduce new report triggering events.
Please review EventID 13505 for a detailed description of the measures.
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#### Final provisions and changes to the draft
The key final provisions are briefly described below. Changes to the draft version that are material in nature are also noted (please see point (3).
(1) Increase in liquid asset requirements: The daily liquid asset requirement will be raised from 10% to 25%, and the weekly liquid asset requirement from 30% to 50% (as proposed). These changes will help money market funds handle significant and prompt investor redemptions during periods of market stress, while still allowing investments in diverse assets during normal market conditions.
(2) Removal of temporary redemption gates and regulatory tie: The SEC will, again as proposed, eliminate provisions that allowed money market funds to impose temporary redemption gates. Additionally, the regulatory tie between the weekly liquid asset threshold and liquidity fees, which permitted funds to impose fees if weekly liquid assets fell below a certain threshold, will be removed.
(3) Liquidity fee requirement: Instead of implementing the proposed swing pricing requirement of institutional prime and institutional tax-exempt money market funds which would have involved an adjustment of a fund’s current NAV per share by a swing factor when the fund has net redemptions, the SEC will introduce a revised liquidity fee framework for such funds. Thereafter, institutional prime and institutional tax-exempt money market funds will be required to „impose mandatory liquidity fees on redeemed shares when daily net redemptions exceed 5% of the funds‘ net assets“, unless the fees are below the de minimes threshold of 0.01% of the value of the redeemed shares.
The size of the fees charged by MMFs must be determined by estimating the costs associated with selling a proportional amount of each security in their portfolio to meet net redemptions. These costs should include the spread, other transaction expenses, and market impact. Rather than analyzing each security individually, funds will be allowed to estimate costs and market impacts for securities with similar characteristics and apply those estimates to all securities of that type in the portfolio. If a fund cannot estimate the costs in good faith, a default liquidity fee of 1% of the redeemed shares‘ value will have to be applied and charged to investors.
Additionally, non-government money market funds will have to impose a discretionary liquidity fee on redeemed shares if the fund’s board determines this to be in a fund’s best interest. Furthermore, and unlike proposed in the draft, the board may delegate the liquidity determination to a fund’s advisor or officers, provided that the board provides adequate guidelines to the adviser and ensures adequate oversight over his work.
(4) Other amendments: The amendments will allow retail and government money market funds, subject to board determinations and investor disclosures, to manage negative interest rate environments by „converting from a stable share price to a floating share price or by reducing the number of outstanding shares to maintain a stable net asset value per share“. The SEC will also revise reporting requirements to enhance transparency and the SEC’s ability to monitor money market fund data. Additionally, the reporting Form N-1A will be amended to reflect the new liquidity fee mechanism as described under (3) and Form PF will be amended to include information that large liquidity fund advisers must report for the private liquidity funds they advise.