On June 5, 2013, the SEC proposed amendments to certain rules under the 1940 Act that govern money market funds. The proposed rule amendments seek to: (1) limit money market funds’ susceptibility to heavy redemptions during periods of market stress, (2) improve money market funds’ ability to deal with contagion from heavy redemptions, (3) preserve to the extent possible the benefits of money market funds for investors, and (4) increase risk transparency in money market funds. The SEC proposed two principal alternative reforms—a floating NAV and liquidity fees/ redemption gates—that could be adopted alone or in combination. In addition, the SEC proposed changes to money market fund diversification and disclosure requirements that would apply under either of the alternative reforms.
As proposed, the floating NAV rule amendments would:
- prohibit money market funds, other than government and retail money market funds, from using the amortized cost method to value portfolio securities and require fund share prices to reflect market-based valuation factors—i.e., allow NAV per share to float instead of remaining at a stable $1.00 share price;
- require money market funds, other than government and retail money market funds, to round share prices to the nearest 1/100th of 1% (basis point rounding method), instead of rounding to the nearest 1% (penny rounding method), in order to allow fund investors to see the fluctuations in share price; and
- allow government money market funds (funds that hold at least 80% of their assets in cash, government securities or repurchase agreements collateralized with government securities) and retail money market funds (funds that limit each shareholder’s redemptions to no more than $1 million per business day) to use the penny rounding method to maintain a stable NAV per share, but prohibit the use of the amortized cost method.
As proposed, the liquidity fees and redemption gates rule amendments would:
- require money market funds to charge a liquidity fee of 2% on redemptions if the fund’s weekly liquid assets (assets such as cash, U.S. Treasury obligations, certain other government securities with remaining maturities of 60 days or less and securities that convert into cash in one week) fall below 15% of total assets, unless the board determines it is not in the best interest of the fund or approves a lower fee;
- allow the board of a money market fund to temporarily suspend, or “gate,” redemptions if the fund’s weekly liquid assets fall below 15% of total assets;
- require that any redemption gate imposed must be lifted within 30 days and limit redemption gates to no more than 30 days in a 90-day period;
- require prompt public disclosure of the crossing of the 15% weekly liquid assets threshold, the imposition and removal of any liquidity fee or redemption gate and the board’s analysis in determining whether or not to impose a liquidity fee or a redemption gate;
- allow all money market funds to use the penny rounding method to maintain a stable NAV per share, but prohibit the use of the amortized cost method; and
- exempt government money market funds from the requirement to impose a liquidity fee, but permit them to impose liquidity fees and redemption gates if there is appropriate disclosure in the fund’s prospectus.
The SEC also stated that it is considering a combination of the two alternatives. If a combination of the two alternatives is adopted, money market funds, other than government and retail money market funds, would be required to maintain a floating NAV and non-government money market funds would be able to impose liquidity fees and redemption gates in certain circumstances.
In addition to the two alternative reforms, the SEC proposed rule amendments to:
- improve disclosure by requiring money market funds to disclose (1) on the money market fund’s website, on a daily basis, the fund’s daily and weekly liquid assets and market-based NAV, (2) new events such as the imposition of a liquidity fee or gate, sponsor support, portfolio security defaults and a decline in NAV per share below $0.9975 on a new Form N-CR, and (3) historic instances of sponsor support in the fund’s statement of additional information;
- amend Form N-MFP to add new reporting requirements and to eliminate the 60-day delay on the public availability of the information filed;
- amend Form PF to enable the SEC to monitor the movement of assets from money market funds to private liquidity funds in response to money market fund reforms by requiring liquidity fund advisers with at least $1 billion in combined money market fund and liquidity fund assets to report substantially the same portfolio information on Form PF as registered money market funds would report on Form N-MFP;
- tighten the diversification requirements under Rule 2a-7 by requiring money market funds to (1) aggregate affiliates for purposes of determining whether they are complying with the 5% concentration limitation in any one issuer, (2) remove the rule, which allows as much as 25% of the value of securities held in a money market fund’s portfolio to be subject to guarantees or demand features from one institution, and (3) aggregate all of the asset-backed securities vehicles sponsored by the same entity for purposes of the 10% guarantor diversification limit, unless the board determines that the money market fund is not relying on the sponsor’s strength or the structural enhancements of the asset-backed security; and
- require money market funds to stress test against the fund’s level of weekly liquid assets falling below 15% of total assets.
Comments on the proposed amendments are due by September 17, 2013.