On June 5, 2013, the U.S. Securities and Exchange Commission (SEC) unanimously proposed for public comment two alternatives for amending Rule 2a-7 and other rules that govern money market funds under the Investment Company Act of 1940.1 The proposed amendments represent the next step in “the public debate that will shape the final rules to address one of the most prominent events arising from the financial crisis.”2
The first alternative would require that prime “institutional” money market funds operate with a floating net asset value (NAV), rounded to the fourth decimal place (e.g., $1.0000). The floating NAV proposal would apply solely to prime “institutional” money market funds and would not apply to “government” or “retail” money market funds. Under this alternative, government money market funds would be defined as funds that invest 80% or more of their assets in cash, government securities and repurchase agreements collateralized with government securities. Retail money market funds would be defined as funds that limit each shareholder’s redemptions to no more than $1 million per business day.
The second alternative would require that non-government money market funds impose a 2% liquidity fee if the fund’s level of “weekly liquid assets” falls below 15% of total assets, unless the fund’s board of directors determines that it would not be in the fund’s best interest to impose the fee or determines to impose a lower liquidity fee. Government money market funds would be permitted, but not required, to impose liquidity fees. In addition, under such circumstances, the fund’s board of directors would be empowered to temporarily suspend shareholder redemptions for up to 30 days (i.e., redemption “gates”).
The SEC indicated that it could adopt either alternative or a combination of the two alternatives. The proposing release seeks comment on the advantages and costs of combining the two alternatives into a single comprehensive proposal.
Lastly, the proposed amendments contain other significant reform proposals, such as tightening diversification requirements under Rule 2a-7, enhancing disclosure requirements, strengthening stress testing and increasing reporting obligations on both registered money market funds and unregistered liquidity funds that could serve as alternative investment products to money market funds.
The proposed amendments begin a new phase in the ongoing debate over the regulation of money market funds that has permeated the investment management industry since the 2008 financial crisis. Comments on the proposed amendments will be due within 90 days after publication in the Federal Register. An upcoming Dechert OnPoint will provide more analysis of the proposed amendments, as well as their potential impact on the money market fund industry.
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