On December 15th, the SEC proposed amendments that would enhance certain reporting requirements to improve the SEC’s ability to monitor and analyze money market fund data. Money market funds are a category of mutual funds registered under the Investment Company Act of 1940 (Act) and regulated pursuant to rule 2a-7 under the Act.
The SEC is proposing money market fund reforms that would provide the following:
an update to reporting requirements on Forms N-MFP and N-CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N-1A to reflect the proposed changes to the regulatory framework for these funds
an update to rule amendments that would address how money market funds with stable net asset values should handle a negative interest rate environment
an update to rule amendments to specify how funds must calculate weighted average maturity and weighted average life
a requirement that stable NAV funds convert to a floating share price if future market conditions result in negative fund yields
Amid the developing economic concerns about the impact of the COVID-19 pandemic, March 2020 saw many investors transfer their assets into cash and short-term government securities. In times of stress, these funds have been vulnerable to heavy redemptions and are invested in short-term funding markets that show a lack of liquidity. Prime and tax-exempt money market funds, notably institutional funds, experienced sizeable outflows, contributing to strain on short-term funding markets. Following the intervention by the Federal Reserve, the Money Market Mutual Fund Liquidity Facility and other programs that support short-term funding markets were established, and the outflows slowed greatly.
The proposed revisions would address concerns about prime and tax-exempt money market funds underscored by these events by:
requiring institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to adjust a fund’s current NAV per share by a swing factor when the fund has net redemption so that redeeming investors bear the liquidity costs of their redemptions
removing the ability of money market funds to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, both eliminating an incentive for preemptive redemptions from certain money market funds, and encouraging funds to more effectively use their existing liquidity buffers in times of stress
increasing the daily liquid asset to 25% and weekly liquid asset to 50% minimum liquidity requirements to provide a significant buffer in the event of rapid redemptions
Interested parties may submit comment regarding the proposed rule during the comment period, which will remain open for 60 days after publication in the Federal Register. For details on ways to respond, refer to the Money Market Fund Reforms Proposed Rule at www.sec.gov.
The proposing release will be published in the Federal Register and the SEC’s website.