On June 5, 2013, the SEC voted unanimously to propose two alternative amendments to Rule 2a-7, the rule governing money market funds. The SEC could adopt either proposal alone or in combination with the other. The proposals mark the latest step in a long march toward money market reform since calls for change began after the Reserve Primary Fund “broke the buck” in the fall of 2008. They also put the SEC back in the regulatory driver’s seat and avoid a standoff with other federal regulators, most notably the Federal Stability Oversight Committee (FSOC).
The first proposed alternative would require institutional prime money market funds to operate with a floating net asset value (NAV). A money market fund’s share price would fluctuate daily, based on the market price of portfolio securities, rounded to the nearest 1/100th of one percent. This proposal would exempt government and “retail” money market funds, which would still be able to maintain a stable NAV. Retail money market funds would be defined as those funds that restrict shareholder redemptions to no more than $1 million per shareholder per day.
Under the second alternative, all money market funds would continue to transact at a stable share price but would have the ability (and sometimes the obligation) to use liquidity fees and redemption gates in times of market stress. Under this alternative, funds whose level of weekly liquid assets falls below 15 percent of total assets would be required to impose a 2 percent liquidity fee on redemptions unless the fund’s board of directors determines the fee is not in the best interests of the fund or that a lesser fee would be more appropriate.
The second alternative would allow the fund’s board to temporarily suspend redemptions of fund shares for up to 30 days if the fund’s weekly liquid assets fall below 15 percent. The board would only be allowed to “gate” a fund for a maximum of 30 days in any 90-day period. Government money market funds would be exempt from the fees and gates requirement.
Regardless of which alternative is adopted, the proposed amendments would eliminate the ability of money market funds to value their portfolio securities at amortized cost, except to the extent permitted for all mutual funds. Funds that would be allowed to continue to maintain a steady NAV (that is, all funds other than prime retail funds under the first proposal) would be required to use the “penny rounding” method, rather than the amortized cost value method.
For more information on the proposed rules, and related disclosure changes, see our recent Client Alert.