|August 2, 2014|
Previously published on July 23, 2014
The U.S. Securities and Exchange Commission voted 3-2 today to adopt significant changes to the regulation of money market funds in an effort to minimize the potential for a systemic “run” on money market funds like the one experienced in 2008.1
This alert provides a broad overview of the reforms adopted by the SEC in a release that is over 850 pages.
The principal reforms, which had been previously proposed as separate alternatives and are now being adopted in combination, involve:
- Floating NAV - Institutional, non-government (prime and municipal) money market funds will no longer be able to use the amortized cost method to price securities and the net asset values (NAVs) of these funds will float. These funds will be required to round their market-based NAVs to four decimal places (or 1/100th of a penny). Retail and government money market funds, however, will be permitted to continue using the amortized cost method or penny rounding method to maintain a stable NAV.
- Liquidity Fees and Redemption Gates - Non-government money market funds (whether institutional or retail) will be subject to liquidity fees and redemption “gates” (i.e., suspension of redemptions). A fund’s Board of Directors may determine to impose a liquidity fee of up to 2% on amounts redeemed and/or a redemption gate if the fund’s weekly liquid assets fall below 30% of total assets. In addition, if the fund’s weekly liquid assets fall below 10%, a liquidity fee of 1% would be required to be implemented, unless the Board determines that it is not in the fund’s interest to impose it. Under the new rules, a fund must lift any gate within 10 business days or once its weekly liquid assets increase above 30% of total assets, and a fund may not impose a gate for more than 10 business days in any 90-day period. Government money market funds will not be subject to these provisions unless they “opt in” to the regime by disclosing in their prospectus that liquidity fees and/or redemption gates may be imposed.
Today’s amendments are largely consistent with the reforms the SEC proposed on June 5, 2013, with some significant modifications. Two key differences from the proposal are the definitions of “retail” money market funds and “government” money market funds.
The SEC had proposed to define “retail” money market funds as those that limit daily redemptions to $1 million per investor. In response to industry comments regarding the operational difficulties this definition would entail, the SEC has instead adopted a definition that would require retail money market funds to have policies and procedures in place that are reasonably designed to ensure that its investors are natural persons.
Under the new rules, a “government” money market fund will refer to a fund that invests at least 99.5% of its assets in cash, government securities, and repurchase agreements collateralized by government securities. The initial proposal, consistent with the current “fund name” rule, would have required only 80% of a money market fund’s assets to be invested in this manner in order to qualify as a “government” money market fund.
Other reforms include enhanced website disclosure obligations (e.g., prompt disclosure of market-based NAVs and amount of weekly and daily liquid assets), changes to Form N-MFP and Form PF, the adoption of a new form for disclosure of certain material events (such as the imposition of liquidity fees or redemption gates), stronger diversification requirements and enhanced stress testing.
In addition, in response to comments from industry participants, members of Congress and other observers, the SEC noted that the U.S. Department of Treasury and the Internal Revenue Service are expected to issue rulemaking and guidance to allay concerns about the tax consequences to investors in money market funds that are subject to the floating NAV requirement.
Money market funds and their sponsors will have two years from the date of the final rule’s publication in the Federal Register to comply with the floating NAV requirement and the amendments relating to liquidity fees and redemption gates (and related amendments). The other reforms will take effect either nine or 18 months after that date, depending on the particular change.
The SEC release regarding these new amendments may be viewed at http://www.sec.gov/rules/final/2014/33-9616.pdf. We expect to issue a more detailed alert on the amendments.
1 In September 2008, The Reserve Primary Fund “broke the buck” (meaning its net asset value per share, or “NAV”, fell below $1.00) one day after Lehman Brothers Holdings Inc. announced its bankruptcy. The event triggered substantial redemptions from other money market funds. Ultimately, the U.S. Department of the Treasury announced a temporary guarantee program for money market funds, which has been credited by many with stopping the runs.