Today, the Securities and Exchange Commission, by a vote of 3 to 2, approved amendments to Rule 2a-7 and other rules that govern money market funds under the Investment Company Act of 1940 (Amendments).¹ Among other things, the Amendments:

• remove redemption gates from Rule 2a-7 and the tie between the weekly liquid assets threshold and liquidity fees;
• institute a new mandatory liquidity fee framework for institutional prime and institutional tax-exempt money market funds in lieu of the proposed swing pricing regime;
• maintain a board’s ability to impose liquidity fees on a discretionary basis for non-government money market funds (i.e., institutional prime and institutional tax-exempt money market funds and retail money market funds);
• substantially increase the required minimum levels of applicable daily and weekly liquid assets for all money market funds;
• permit stable net asset value (NAV) money market funds to institute a reverse distribution mechanism (RDM) or similar mechanisms during a negative interest rate environment to maintain a stable $1.00 share price; and
• enhance the reporting requirement of registered money market funds as well as SEC-registered investment advisers to private liquidity funds on Form PF.

In his opening remarks, SEC Chairman Gary Gensler stated that the Amendments “will enhance these funds’ resiliency and ability to protect against dilution.” Commissioners Hester M. Pierce and Mark Uyeda, who voted against the Amendments, expressed their disapproval of the mandatory liquidity fee framework, and suggested that the framework should have been re-proposed for additional public comment.

The SEC originally proposed its reforms in December 2021 (Proposal)² in response to the stresses experienced by money market funds in March 2020, when the onset of the COVID-19 coronavirus pandemic led to substantial redemptions, primarily from institutional prime money market funds. Adopting money market fund reform became a more significant policy priority for financial regulators both within and outside of the SEC following the stresses in the banking sector in early 2023.³ Although the SEC did not adopt elements of the Proposal that were most concerning to the industry, namely mandatory swing pricing for institutional prime and institutional tax-exempt money market funds and a requirement for stable NAV money market funds to determine that their intermediaries are able to support a floating NAV, certain elements of the Amendments will likely increase costs to fund sponsors and have commercial implications for institutional prime and institutional tax-exempt money market funds. The SEC’s decision not to adopt the proposed swing pricing regime for institutional prime and institutional tax-exempt money market funds may be a preview for future rulemaking relating to the proposed rules that would require open-end funds to utilize swing pricing.⁴

The core aspects of the Amendments are as follows:

• Removal of Redemption Gates and the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees. The Amendments remove provisions in Rule 2a-7 that permit a money market fund to impose a temporary redemption gate.⁵ The Amendments also remove provisions in Rule 2a-7 that tied a money market fund’s ability to impose liquidity fees to its level of weekly liquid assets. In the Adopting Release, the SEC noted that in March 2020, these provisions “had unintended consequences” and that the mere possibility of liquidity fees and/or redemption gates being imposed instead “appears to have contributed to investors' incentives to redeem” and “contributed to incentives for money market managers to maintain weekly liquid asset levels above a 30% weekly liquid asset threshold, rather than use those assets to meet redemptions.” Given these unintended consequences, the SEC, with the support of many commenters on the Proposal, has removed these provisions from Rule 2a-7 to “avoid predictable triggers that may incentivize investors to preemptively redeem to avoid incurring fees.”
• Mandatory Liquidity Fee Framework and Discretionary Liquidity Fees. The Amendments require institutional prime and institutional tax-exempt money market funds to impose a liquidity fee when a fund experiences daily net redemptions that exceed 5% of net assets based on flow information available within a reasonable period after the last computation of the fund’s NAV on that day (or such smaller amount of net redemptions as the board determines), unless those costs are de minimis (i.e., less than 1 basis point). The fee must be based on a good faith estimate, supported by data, of the costs the fund would incur if it sold a pro rata amount of each security in its portfolio to satisfy the amount of the net redemptions. If the costs of selling a pro rata amount of each security in a fund’s portfolio cannot be estimated in good faith and supported by data, the fund must impose a default fee of 1%. Additionally, the board of a non-government money market fund (i.e., institutional prime and institutional tax-exempt money market funds and retail money market funds) or its delegate may require the fund to impose a discretionary liquidity fee (not to exceed 2% of the value of the shares redeemed) if it determines that such a fee would be in the best interests of the fund.

  The Proposal would have imposed a mandatory swing pricing regime as an alternate method for institutional prime and institutional tax-exempt money market funds to allocate redemption costs to redeeming investors by requiring these funds to adjust their NAV per share downward by a “swing factor” when they experience net redemptions during a “pricing period.” The Proposal acknowledged that swing pricing would introduce new operational complexity to institutional money market funds; and, indeed, commenters to the Proposal were heavily opposed to the proposed swing pricing requirement in part due to these operational concerns as well as a belief that swing pricing would not have the intended effect of preventing runs on money market funds, among other concerns. The SEC stated in the Adopting Release that it believes that “the mandatory liquidity fee will reduce operational burdens associated with swing pricing while still achieving many of the benefits [the SEC was] seeking with swing pricing by allocating liquidity costs to redeeming investors in stressed periods.” However, the mandatory liquidity fee framework may impose similar operational complexities.

• Increased Liquidity Thresholds. The Amendments substantially increase the required minimum levels of daily and weekly liquid assets for all money market funds from 10% and 30% to 25% and 50%, respectively. Commenters to the Proposal generally supported increases in the daily and weekly liquid asset thresholds, though they differed on the appropriate amount of such levels. The Amendments adopt the increased minimum liquidity levels as proposed.
• Potential Negative Interest Rate Environments. The SEC also adopted certain amendments to address a potential negative interest rate environment. In a change from the Proposal, the Amendments allow a stable NAV money market fund to reduce the number of its shares outstanding to maintain a stable share price, in addition to its existing ability to covert to a floating NAV. Utilization of these measures will be subject to certain board determinations and disclosures to investors. The Amendments will not require, as proposed, a stable NAV money market fund to determine that its financial intermediaries are able to process share transactions if the fund converts to a floating NAV.
• Enhanced Reporting Requirements. The SEC adopted certain additional reporting requirements for registered money market funds, including a requirement for those money market funds to file a report on Form N-CR if the percentage of its total assets in daily liquid assets or weekly liquid assets falls below 12.5% or 25%, respectively. The Amendments also add several new disclosure items to Form N-MFP, including certain information regarding large fund shareholders and additional data regarding portfolio securities sold during the reporting period.
• Form PF Amendments. The SEC also adopted amendments to reporting by large liquidity fund advisers⁶ in respect of the liquidity funds⁷ that they manage in Section 3 of Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. According to the Adopting Release, liquidity funds “follow similar investment strategies as money market funds” in that they are managed with the goal of maintaining stable net asset value or minimizing principal volatility, but are not subject to Rule 2a-7 and thus “may be more sensitive to market stress relative to money market funds.” In respect of the amendments regarding liquidity funds, these amendments require additional information on such funds (e.g., “asset turnover, liquidity management and secondary market activities, subscriptions and redemptions, and ownership type and concentration”). The Adopting Release explains that the final amendments, while adopted largely as proposed, were modified to tailor the reporting to private liquidity funds and maintain consistency with the reporting requirements for registered money market funds under amended Form N-MFP, and the final amendments seek to enhance the SEC’s and the Financial Stability Oversight Council’s⁸ ability to assess short-term financing markets and provide oversight of liquidity funds and their advisers.⁹
• Compliance Dates. The Amendments will be effective 60 days after publication in the Federal Register (Effective Date). The compliance date for (i) the mandatory liquidity fee requirement will be 12-months from the Effective Date; (ii) the discretionary liquidity fee, increased minimum liquidity requirements, and other amendments will be 6-months from the Effective Date; and (iii) amendments relating to Form N-MFP and Form PF will be effective on June 11, 2024.

An upcoming Dechert OnPoint will provide more analysis of the Amendments, as well as their potential impact on the money market fund industry.

Footnotes

1) Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A, Release No. IC-34959 (Jul. 12, 2023) (Adopting Release). The three Democratic Commissioners, Chairman Gensler and Commissioners Caroline A. Crenshaw and Jaime Lizárraga voted in favor of the Amendments, whereas the two Republican Commissioners, Commissioner Hester M. Peirce and Mark Uyeda voted against the Amendments.

2) Money Market Fund Reforms, Release No. IC-34441 (Dec. 15, 2021). For further information regarding the proposed rulemaking, please refer to Dechert OnPoint, SEC Proposes New Round of Money Market Fund Reforms in Response to March 2020 Redemptions.

3) See Sec’y of the Treas. Janet Yellen, Remarks at the National Association for Business Economics 39th Annual Economic Policy Conference (Mar. 30, 2023).

4) Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, Release Nos. 33-11130; IC-34746 (Nov. 2, 2022).

5) The Amendments would not impact a money market fund’s ability to suspend redemptions pursuant to Rule 22e-3 under the 1940 Act in order to facilitate an orderly liquidation.

6) An adviser becomes a “large liquidity fund adviser” at $1.0 billion in regulatory assets under management attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter. Large liquidity fund advisers are required to report quarterly. Form PF: General Instructions at Instruction 1.

7) A “liquidity fund” is “[a]ny private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.” Form PF: Glossary of Terms.

8) The Adopting Release states that FSOC was consulted to ensure that the information reported continues to be useful in assessing systemic risk.

9) Amendments to Form PF reporting for large liquidity fund advisers were initially proposed in January 2022 along with a broader set of amendments to Form PF. Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Release No. IA-5950 (Jan. 26, 2022); please refer to the Dechert OnPoint for additional information, SEC Proposes Amendments to Form PF. The SEC finalized rules in respect of other types of private funds in May 2023, but we can anticipate further rulemaking in this area as there is a joint proposal with the CFTC to amend Form PF that has yet to be finalized. Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023); Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers, Release No. IA-6083 (Aug. 10, 2022).