Key SEC Money Market Fund Reforms

• On 12 July 2023, the Securities and Exchange Commission (SEC) amended Rule 2a-7 (the “Rule”) to eliminate the redemption gating provision for money market funds altogether and changed the liquidity fee structure to remove weekly liquid asset (WLA)-linked thresholds.
  
  
• The Rule implemented a modified liquidity fee framework that will provide for both mandatory and discretionary liquidity fees and increased the required minimum levels of applicable weekly and daily liquid assets (DLA) for all money market funds.
  
  
• The SEC also addressed how money market funds with stable net asset values may handle a negative interest rate environment; clarified the calculation of weighted average maturity (WAM) and weighted average life (WAL); and amended reporting requirements on Form N-CR and Form N-MFP.

We provide further details on the key reforms below.

Liquidity Fee Requirement

1. Mandatory Liquidity Fees

Applicable to Institutional Prime and Institutional Tax-Exempt Money Market Funds. A mandatory fee is charged to redeeming investors when a fund’s net redemptions in a day exceed 5% of its net assets (subject to a de minimis exception). The liquidity fee applies to all shares that are redeemed, including those redeemed during pricing periods early in the day, on the day the fund has total daily net redemptions that exceed 5% of net assets.

The size of the fee generally is determined by making a good faith estimate of the liquidity costs, including the spread, other transactions and market impact costs the fund would incur if it were to sell a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions.

De Minimis Exception

No liquidity fee is required if the liquidity costs estimated in good faith and supported by data are less than 1 basis point (0.01%) of the value of the shares redeemed. If the estimated liquidity costs are less than one basis point of the value of the shares redeemed, a fund is not required to apply a fee under the de minimis exception contained in the amended Rule.

If a fund cannot make a good faith estimate of the liquidity costs, supported by data, the default liquidity fee is 1% of the value of shares redeemed.

2. Discretionary Liquidity Fees

Applicable to Prime and tax-exempt money market funds; government money market funds may opt in. Irrespective of liquidity or redemption levels, a discretionary fee may be imposed on redeeming investors when a fund’s board determines that such a fee is in the best interests of the respective fund. The discretionary fee may not exceed 2% of the value of the shares redeemed.

Daily and Weekly Liquidity Requirements

The Rule increased the DLA requirement from 10% to 25% and the WLA requirement from 30% to 50%. The SEC implemented the liquidity fee structure in lieu of adopting "swing pricing" as part of the amended Rule.

Potential Negative Interest Rates

A stable NAV fund will be permitted under the Rule to either convert to a floating NAV or to engage in share cancellation in this scenario (i.e., reducing the number of shares outstanding).

If a stable NAV fund converts to a floating NAV under these circumstances, the fund’s losses will be reflected through a declining share price.

If a fund uses a share cancellation mechanism, the fund will maintain a stable share price, despite losing value, by reducing the number of its outstanding shares. Investors in such a fund would observe a stable share price but a declining number of shares for their investment.

Disclosures must include: (i) advance notification to investors in a fund’s prospectus that the fund plans to use share cancellation in a negative interest rate event and the potential effects on investors; and (ii) when the fund is cancelling shares, information in each account statement identifying that such practice is in use and explaining the impact it has on investors.

Amendments and Clarifications to Reporting Requirements

1. Clarification to the Calculation of WAM and WAL

Funds will be required to calculate WAM and WAL based on the percentage of each security’s market value in the portfolio (previously, some funds calculated WAM and WAL based on the amortized cost of each security).

2. Highlights to Amendments of Form N-CR

• Reporting of liquidity threshold events: DLA or WLA decline of more than 50% below regulatory minimums.
• Other amendments: Add specificity to identifying the funds being reported on, clean up requirements on null liquidity fees and redemption gates, and amend the section on financial support to provide more clarity.

3. Highlights to Amendments of Form N-MFP

• Requirement for money market funds to report the type of any beneficial owner who owns 5% or more of a share class.
• Fund-level shareholder composition by SEC defined types will be required for institutional prime and institutional tax exempt.
• Gross market value of portfolio securities a prime money market fund sold or disposed of during the reporting period.
• Reporting for the new liquidity fees.
• Reporting on share cancellation for stable NAV funds.
• Enhanced reporting on repurchase agreements and more frequent data points and clarification of some existing reporting.

Expected Timeline

The final Rule is effective 60 days after it is published in the Federal Register. Once effective, funds must comply by the following dates:

• Removal of the liquidity fee and redemption gates provisions and associated disclosures: as of the effective date 
• Minimum portfolio liquidity requirements (DLA/WLA) and discretionary liquidity fee Amendments: 6 months from the effective date
• Mandatory liquidity Fees: 12 months from effective date
• Reporting Amendments: June 11, 2024