The SEC recently proposed rules to reform the way money market funds, which currently have over $2.9 trillion in assets, operate in order to make them less susceptible to large redemptions that could harm investors.  Specifically, the SEC proposed two alternatives that could be adopted alone or in combination.  The first alternative would require a floating net asset value for prime institutional money market funds.  The floating NAV is intended to address the heightened incentive for shareholders that have to redeem shares in times of high volatility and to improve the transparency of money market fund risks through more visible valuation and pricing methods.  The second alternative would allow the use of liquidity fees and redemption gates during times of high volatility. 

The proposed rules would also (i) require money market funds to provide additional disclosures pertaining to their levels of liquid assets, certain material events and sponsor support; (ii) eliminate the 60-day delay on public access to the information filed on Form N-MFP regarding portfolio holdings; (iii) amend Form PF to improve private liquidity fund reporting; (iv) strengthen the diversification requirements of a money market fund’s portfolio by requiring that money market funds and their affiliates aggregate their holdings for purposes of complying with the 5% concentration limit, removing the “25% basket” and requiring money market funds to aggregate all of the asset-backed securities vehicles sponsored by the same entity for purposes of the 10% guarantor diversification limit; and (v) enhance the stress testing requirements for money market funds adopted by the SEC in 2010.     

The SEC press release regarding the proposed rule can be found here and the full text of the proposed rule can be found here