On July 12th, the SEC announced that it is amending rules that govern money market funds under the Investment Company Act of 1940. The amendments involve changes and updates to Form PF and Form N-CR, including changing the format of Form N-CR to a structured data language.
Money market funds are managed with the aim of providing principal stability and access to liquidity by investing in high-quality, short-term debt securities with values that do not fluctuate greatly under typical market conditions. These features have made money market funds a significant source of short-term financing for businesses, banks, and governments. Money market funds have also become popular cash management vehicles for retail and institutional investors. March 2020 saw the trend of investors reallocating their assets into cash and short-term government securities in response to economic concerns related to the effects of the COVID-19 pandemic. Prime and tax-exempt money market funds (in particular, institutional funds) experienced large outflows, contributing to stress on short-term funding markets. The rule amendments will address concerns about prime and tax-exempt money market funds underscored by these events.
The amendments are intended to enhance the resilience and transparency of money market funds by:
increasing minimum liquidity requirements (to at least 25 percent of a fund’s total assets in daily liquid assets and at least 50 percent of a fund’s total assets in weekly liquid assets) to provide a more substantial buffer in the event of rapid redemptions
enhancing certain reporting requirements to improve the SEC’s ability to monitor and assess money market fund data
removing provisions from the current rule that permit a money market fund to temporarily suspend redemptions and removing the regulatory tie between the imposition of liquidity fees and a fund’s liquidity level if their weekly liquid assets fall below a certain threshold
reducing the risk of investor runs on money market funds during periods of market stress
requiring institutional prime and institutional tax-exempt money market funds to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets (unless the fund’s liquidity costs are negligible)
requiring non-government money market funds to impose a discretionary liquidity fee if the fund’s board, or its delegate, determines that a fee is in the best interest of the fund. The amended liquidity fee framework is designed to both protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.
The SEC also adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to require supplemental information regarding the liquidity funds they advise that is generally aligned with the amended reporting for money market funds. These amendments were proposed in January 2022. Importantly, Form N-CR will now be submitted to the SEC in XML. The SEC is amending certain reporting requirements on Form N-MFP and making conforming changes to Form N-1A as well.
The final rule will becomes effective 60 days following its publication in the Federal Register, with a tiered transition period for funds to comply with the rules. The reporting form amendments go into effect June 11, 2024. For more information, see the final rule on the SEC’s website.