Unpacking the SEC’s Money Market Proposal
The SEC has published its long awaited proposed amendments to Rule 2a-7 of the Investment Company Act, the rule governing money market funds.
The proposal includes two alternatives, either or both of which could be adopted by a fund complex. Under the first alternative, prime institutional money funds would be required to transact at a floating net asset value (“NAV”) and be required to “basis point round” their share price to the nearest 1/100th of one percent.
Government and retail money market funds would be allowed to continue using the penny rounding method of pricing and maintain a stable share price. A government money market fund would be defined as any money market fund that holds at least 80 percent of its assets in cash, government securities, or repurchase agreements collateralized with government securities. A retail money market fund would be defined as a money market fund that limits each shareholder’s redemptions to no more than $1 million per business day.
Under the second alternative, a money market fund (other than a government fund) which maintained a stable share price and whose weekly liquid assets fell below 15% of its total assets would be required to impose a liquidity fee of 2% on all redemptions (unless the fund’s board determined that the liquidity fee is not in the best interest of the fund). Under this alternative, once the money market fund crossed this threshold, the fund’s board also would have the ability to temporarily suspend redemptions (or “gate”) the fund for a limited period of time if the board determines that doing so is in the fund’s best interest.
Government money market funds would be exempt from the fees and gates requirement but could voluntarily opt into this requirement.
The proposed rules also include a number of additional disclosure requirements that would apply under either alternative. The proposed disclosures vary depending on the alternative proposal adopted. In addition, the proposed rules would require daily website disclosure of a fund’s daily and weekly liquid assets and market-based NAV per share, and historic instances of sponsor support. Funds would also be required to make prompt disclosure of certain events, including portfolio security defaults, and a fall in the market-based price of the fund below $0.9975.
Amendments to Form N-MFP to provide additional information relevant to assessing the risk of funds are also included. Moreover, the information disclosed would be made public immediately upon filing.
In addition, a large liquidity fund adviser that manages a private liquidity fund would be required to provide security-level reporting on Form PF that is substantially the same as those currently required to be reported by money market funds on Form N-MFP.
The proposed amendments also would tighten the diversification requirements of Rule 2a-7 by requiring consolidation of certain affiliates for purposes of the 5% issuer diversification requirement, requiring funds to presumptively treat the sponsors of asset-backed securities as guarantors subject to Rule 2a-7’s diversification requirements, and removing the so-called “twenty-five percent basket.”
Finally, the proposed rule would amend the stress testing provision of Rule 2a-7 to enhance how funds stress test their portfolios and require that money market funds stress test against the fund’s level of weekly liquid assets falling below 15% of total assets.
Comments should be submitted within 90 days after publication in the Federal Register, which is expected shortly. View the proposing release and proposed text here.