The Securities and Exchange Commission (“SEC” or “Commission”) adopted amendments to the rules governing money market mutual funds (“MMFs” or “funds”) under Title 17, Part 270 – Rules and Regulations of the Investment Company Act of 1940 (“Act”) on July 23, 2014. The amendments, which are designed to address systemic risks posed by the susceptibility of MMFs to heavy redemptions in times of fund or market stress, consist of two principle reforms to Section 270.2a-7 (“Rule 2a-7”) of the Act contained in the Commission’s June 2013 MMF reform proposed rule (“June 2013 proposal”), with certain modifications:
- Floating net asset value (“NAV”), including removal of the valuation exemption permitting institutional non-government MMFs to maintain a stable NAV. Institutional non-government MMFs, whose investors, the SEC indicates, have historically made the heaviest redemptions during times of fund or market stress, will be required to transact at a floating NAV by selling and redeeming shares based on the current market-based value of the securities in their underlying portfolios, rounded to the fourth decimal place (e.g., $1.0000).
- Liquidity fees and redemption gates (“fees and gates”), including provisions providing non-governmet MMF boards of directors with “new tools” to stem heavy redemptions by (1) allowing them to impose a liquidity fee of no more than 2 percent, if a fund’s weekly liquidity level falls below the required regulatory threshold, and (2) giving them discretion to suspend redemptions temporarily under the same circumstances (i.e., to “gate” the funds). Under these amendments, all non-government MMFs will be required to impose a liquidity fee of 1 percent if the fund’s weekly liquidity level falls below 10 percent of total assets, unless the fund’s board determines that either imposing such a fee is not in the “best interests” of the fund or that a higher fee of up to 2 percent (or a lower fee) is in the fund’s best interest.
Additionally, the SEC adopted amendments designed to improve MMFs’ resiliency by increasing the diversification of their portfolios, enhancing their stress testing requirements, and improving transparency through additional disclosure requirements to both the SEC and investors. Lastly, the amendments require investment advisers to certain large unregistered liquidity funds to provide additional information to the SEC.
The rules became effective October 14, 2014. The SEC has established compliance dates in 2015 and 2016 that are applicable to specific provisions of the rules that are outlined in more detail below.