Money Market Funds

SEC Adopts Reforms to Money Market Funds for Enhanced Resiliency

The Securities and Exchange Commission (SEC) has announced the adoption of amendments to the rules governing money market funds under the Investment Company Act of 1940. These amendments aim to strengthen the resiliency of money market funds and address concerns related to liquidity and investor runs during periods of market stress. In addition, certain reporting forms applicable to money market funds and large private liquidity fund advisers will be modified. The reforms will become effective 60 days after publication in the Federal Register, with a tiered transition period for funds to comply, while the reporting form amendments will take effect on June 11, 2024.

Enhancing Liquidity Requirements and Reducing Risk

One of the key amendments is the increase in minimum liquidity requirements for money market funds. The goal is to provide a more substantial liquidity buffer that can withstand rapid redemptions. By bolstering liquidity, money market funds are better equipped to navigate challenging market conditions and mitigate the risk of investor runs.

The amendments also eliminate provisions that permit funds to temporarily suspend redemptions through gates. Instead, funds will have the ability to impose liquidity fees if their weekly liquid assets fall below a specified threshold. These changes are intended to enhance the stability and resilience of money market funds, safeguarding the interests of investors.

Addressing Redemption Costs and Allocating Fees Fairly

To address concerns regarding redemption costs and liquidity, the amendments introduce measures for institutional prime and institutional tax-exempt money market funds. These funds will be required to impose liquidity fees when daily net redemptions exceed 5 percent of net assets unless the liquidity costs are negligible.

Furthermore, any non-government money market fund will be empowered to impose a discretionary liquidity fee if the fund’s board determines it to be in the best interest of the fund. These fee provisions aim to protect remaining shareholders from dilution and ensure that redeeming shareholders bear the costs associated with redeeming from the fund during periods of costly liquidity in short-term funding markets. By allocating costs more fairly, the amendments aim to create a more equitable environment for investors.

Fortify Money Market Funds

SEC Chair Gary Gensler emphasizes the importance of these reforms in enhancing the resiliency and transparency of money market funds. With the size of these funds reaching nearly $6 trillion, they serve as an alternative deposit option for millions of Americans. However, structural liquidity mismatches can pose risks, leading to investor concerns about dilution and illiquidity during times of market stress. The adoption of these amendments seeks to fortify money market funds, making them more resilient, liquid, and transparent, even in challenging market conditions. By improving the funds’ ability to protect against dilution, these reforms ultimately benefit investors and instill confidence in the stability of the market.

Amendments to Reporting Forms

In addition to the reforms to money market funds, the SEC’s adoption of amendments includes modifications to certain reporting forms applicable to money market funds and large private liquidity fund advisers. These changes aim to enhance reporting requirements and provide regulators with a clearer picture of fund activities and market dynamics. Effective June 11, 2024, these reporting form amendments will contribute to a more comprehensive understanding of the money market fund landscape, enabling regulatory bodies to make informed decisions and ensure the continued integrity of the market.

The SEC’s adoption of money market fund reforms and amendments to reporting requirements reflects a proactive approach to protect investors and strengthen the stability of the financial system. By increasing liquidity requirements, introducing liquidity fees, and addressing redemption costs, the amendments aim to reduce the risk of investor runs and enhance the resiliency of money market funds. Furthermore, modifications to reporting forms contribute to a more transparent and well-regulated market environment. These reforms mark an important step in safeguarding the interests of investors and promoting the integrity of the money market fund industry.

Money Market Funds