Yesterday, the Securities and Exchange Commission finally reached a conclusion on how it would alter its approach to regulating money market funds in response to concerns that these funds can pose systemic risks. In particular, by a 3-2 vote, the Commission adopted a two-pronged approach. The amendments will require that institutional prime money market funds use a variable NAV instead of a stable $1.00 NAV. The new rules will also allow the boards of all money market funds to impose liquidity fees and redemption gates to address the risk of runs. The rules will take effect in two years in order to allow the industry time to implement systems and other needed changes.
The Commission limited the requirement to employ a floating NAV to institutional prime money market funds based on its belief that this type of fund poses a unique risk of runs. In response to comments, the Commission modified its originally proposed definitions of government and retail money market funds, which are exempt from the floating NAV requirement. Under the revised definitions:
• A “government money market fund” is a fund that invests “at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are ‘collateralized fully’ (i.e., collateralized by cash or government securities).”
• A “retail money market fund” is a fund that has “policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons.”
Notably, the Commission did not adopt commenters’ suggestion that municipal money market funds be exempted, instead requiring that these funds fall under the retail exemption if they wish to maintain a stable NAV. Those funds that do fall under the requirement will need to calculate the NAV based on market value to the nearest basis point. To alleviate tax and recordkeeping concerns with the requirement, the Department of the Treasury yesterday issued proposed relief in the form of aggregate reporting for gains and losses and a final revenue procedure exempting affected investments from wash sale rules.
The amendments also allow the fund board to impose liquidity fees of up to 2% and redemption gates for a period of up to 10 business days in a 90-day period where the fund’s weekly liquid assets fall below 30% of its total assets. Where liquid assets fall below 10%, the board would be required to impose a 1% fee, unless it makes a determination that the fee is not in the fund’s best interest. Government money market funds are excluded from this requirement, but may nevertheless impose a gate or fee, subject to the amendment’s provisions, if the fund has previously disclosed its ability to employ such measures in the prospectus. When weekly liquid assets again rise above the 30% mark, the fund would need to remove any liquidity fee or redemption gate. Citing the Forum’s comment letter, the adopting release states that the SEC determined to adopt a “best interests of the fund” standard for board action. Within one business day of certain events, including the imposition of a gate or liquidity fee, the fund will be required to file Form N-CR with the Commission. The fund would then file a follow-up form within four business days providing additional detail.
Commissioners Piwowar and Stein dissented. Piwowar argued that the amendments do not represent the least onerous possibility available. While he believed that gates and represented the most effective tools available, requiring a floating NAV would not stop runs and would not counter the “first mover advantage.” Conversely, Stein argued that the floating NAV requirement would be effective, but that the gates and liquidity fee proposal would only serve to increase the risk of investor runs and the possibility that issues with one fund would increase the risk of an investor run at another fund.
The amendments also included enhanced disclosure, stress testing, and diversification requirements. The Commission also proposed exemptions from Rule 10b-10 requirements which would allow broker-dealers relief from the requirement to send immediate confirmations with floating NAV money market funds, and re-proposed amendments implementing requirements from Dodd-Frank that would remove references to credit ratings. Under the proposal, boards would assess credit risk based on subjective standards with suggested factors from the proposed amendments.