On January 27, the Securities and Exchange Commission adopted new rules designed to address weaknesses in the money market fund regulatory regime exposed by the recent financial crisis. The new rules seek to (1) reduce the level of risk taken by money market fund portfolio managers, (2) enhance disclosure of portfolio securities, and (3) improve money market fund operations.

With respect to reducing risk, the new rules establish minimum portfolio liquidity requirements (as a percentage of assets), increase limitations on a money market fund’s ability to purchase “second tier” securities and shorten portfolio average maturity limits. In addition, portfolio managers will be required to develop procedures to anticipate the likelihood of large redemptions and to hold sufficiently liquid securities to meet foreseeable redemptions, conduct periodic stress tests and designate annually at least four Nationally Recognized Statistical Rating Organizations whose ratings the fund’s board deems to be reliable.

The new rules require money market funds to post, on a monthly basis, their portfolio holdings on their websites and disclose them to the SEC through an interactive database. Disclosure to the SEC would include a money market fund’s “shadow” net asset value (NAV) based on market prices, rather than the stable $1.00 NAV at which shareholder transactions are processed. In order to promote orderly liquidation, the new rules permit a money market fund’s board of directors to suspend redemptions if the fund is about to “break the buck” and it elects to liquidate the fund. The rules also expand the ability of affiliates to purchase distressed assets in order to protect a fund against losses.

The new rules will become effective 60 days after publication in the Federal Register.

The SEC press release, which includes details on credit quality standards, maturity limits of portfolio securities and liquidity requirements, is available here.