On July 12, the Securities and Exchange Commission (Commission) adopted amendments to Rule 2a-7 governing money market funds under the Investment Company Act of 1940 (1940 Act). The amendments will increase minimum liquidity requirements for money market funds, remove provisions from the current rule permitting money market funds to temporarily suspend redemptions through a “redemption gate” and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. The amendments were spurred by the liquidity crisis of March 2020, during which nongovernment money market funds experienced significant outflows.
Notably, in response to industry pushback, the amendments do not include a swing pricing requirement, as was initially proposed. Instead, they include a modified liquidity fee framework, as summarized below, with other key aspects of the amended requirements.
Removal of Redemption Gates From Rule 2a-7
The Commission adopted, as proposed, the removal of money market funds’ ability to temporarily suspend redemptions (impose a redemption gate) under Rule 2a-7. The Commission stated its position is that removing these provisions will reduce the risk of investor runs on money market funds during periods of economic stress. Money market funds will continue to be able to impose permanent gates to facilitate orderly liquidation of a fund.
Liquidity Fee Requirement
The Commission adopted a mandatory liquidity fee framework for institutional prime and institutional tax-exempt funds as an alternative to the initially proposed swing pricing requirement. The mandatory fee is triggered when net redemptions for the business day exceed 5% of net assets. In addition, the amended rule also permits any nongovernment money fund to adopt a discretionary liquidity fee if the board determines the fee is in the best interests of the fund.
Amendments to Portfolio Liquidity Requirements
The Commission adopted, as proposed, requirements that a money market fund hold at least 25% of its total assets in daily liquid assets and at least 50% of its total assets in weekly liquid assets. This represents increases from 10% and 30%, respectively, under the prior rule.
Amendments Related to Potential Negative Interest Rates
The final rule maintains the ability of retail and government money market funds to convert to a floating share price in the event of a negative interest rate environment. However, it adds the ability of stable net asset value (NAV) funds to reduce the number of shares outstanding to maintain a stable NAV per share in the event of negative interest rates, subject to certain board determinations and disclosures to investors.
Amendments To Specify the Calculation of Weighted Average Maturity and Weighted Average Life
The Commission adopted, as proposed, amendments to specify the calculations of “dollar-weighted average portfolio maturity” (WAM) and “dollar-weighted average life maturity” (WAL). The amended definitions require funds to calculate WAM and WAL based on the percentage of each security’s market value in the portfolio, eliminating inconsistencies between funds that calculated WAM and WAL differently.
Amendments to Reporting Requirements
The Commission adopted amendments expanding Form N-CR to require a money market fund to report publicly if it experiences a liquidity threshold event. Under the final amendments, a fund experiencing a liquidity threshold event is required to report: (1) the initial date on which the fund fell below either the 25% weekly liquid assets or the 12.5% daily liquid assets threshold, (2) the percentage of the fund’s total assets invested in both weekly liquid assets and daily liquid assets on the initial date of a liquidity threshold event, and (3) a brief description of the facts and circumstances leading to the liquidity threshold event. A fund will have to file a report within one business day after occurrence of a liquidity threshold event; however, a fund may file an amended report providing the required brief description of the facts and circumstances leading to the liquidity threshold event up to four business days after such event.
Form N-MFP, the public reporting form used for monthly reports of money market funds, was also amended and will require reporting of additional information about the composition and concentration of money market fund shareholders, applicability of liquidity fees, and share cancellation in negative interest rate environments. With respect to shareholder concentration, the amended form will require a money market fund to report the type of beneficial or record owner owning 5% or more of the shares outstanding in the relevant class but not the names of such owners as initially proposed. With respect to shareholder composition, the amended form requires nongovernment money market funds to categorize shareholders according to certain specified types. The amended Form N-MFP also requires reporting of the date of application of any liquidity fee applied during the reporting period, the type of liquidity fee and the amount of the liquidity fee applied.
The final amendments to Rule 2a-7 become effective 60 days after the date of publication of the final rule in the Federal Register, with a tiered transition period for funds to comply with the amendments. Compliance with the mandatory and discretionary liquidity fee frameworks is required beginning 12 months after the effective date of the amendments. Compliance with the updated WAM and WAL calculations and portfolio liquidity requirements must begin no later than six months after the effective date of the amendments. Amendments to Forms N-CR and N-MFP are effective June 11, 2024. The full release can be found here.