SEC Adopts Money Market Fund Reform Rules

The SEC adopted amendments to the rules that govern money market mutual funds. According to the SEC, these amendments build on the reforms adopted in March 2010, and make structural and operational reforms to address mitigating the risks of investor runs on money market funds while preserving the benefits of the funds.

Specifically, the new rules require a floating net asset value (“NAV”) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rules also provide non-government money market fund boards new tools, such as liquidity fees and redemption gates, to address runs. 

With a floating NAV, institutional prime money market funds are required to value their portfolio securities using market prices. These funds can sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.

The final rules provide a two-year transition period to enable funds and investors time to fully adjust their systems. 

According to SEC Chair White, the reforms “fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.”

The SEC also issued a notice proposing exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds. Additionally, the SEC re-proposed amendments to the SEC’s money market fund rules and Form N-MFP to address provisions that reference credit ratings, which is consistent with the Dodd-Frank requirements that the SEC review and replace rules that use credit ratings as an assessment of creditworthiness.

Lofchie Comment: The statements from the various SEC Commissioners make for interesting reading in that they all reflect some degree of uncertainty or skepticism as to the new rules (leaving aside the statement from Chair White, from whom such a comment would arguably have been less appropriate). That uncertainty seems to be a prudent reaction to rule changes that are likely to be significant to the money market globally.

The Commissioners’ comments also seemed to reflect ongoing dialog, and perhaps tensions, with the banking regulators and with FSOC. See, for example, the statement by Commissioner Piwowar in which he noted that if banking regulators are concerned at the over-reliance by banks on the use of money market funds, that over reliance should be addressed by the bank regulators oversight of banks. On the other hand, Commissioner Stein seemed to suggest in her statement that the SEC should generally defer to the Financial Stability Oversight Council, which, according to Commissioner Stein “must continue to play a leading role” and is “uniquely positioned to tap the expertise of each regulator.” For its part, FSOC released a brief statement that it “looks forward to more fully examining the SEC’s rule and its potential impact on [money market funds] and financial stability,” which seems to be less than a full endorsement.

See: Text of Money Market Fund Reform Final Rules and Amendments to Form PF; Text of Re-Proposed Rule to Remove Credit Ratings References in Money Market Fund Rule; Money Market Proposed Permanent Exemption; SEC Press Release.
See also: Chair White’s Statement; Video of Chair White’s Statement; Commissioner Gallagher’s Statement; Commissioner Piwowar’s Statement; Commissioner Aguilar’s Statement; Commissioner Stein’s Statement; FSOC Statement on Rules; SIFMA Statement on Rules.