SEC Proposes New Round of Money Market Fund Reforms in Response to March 2020 Redemptions

The Securities and Exchange Commission, by a vote of three-to-two, on December 15, 2021, proposed amendments (Proposed Amendments) to Rule 2a-7 and other rules that govern money market funds (money funds) under the Investment Company Act of 1940. The Proposed Amendments would: substantially raise minimum liquidity levels for all money funds; remove liquidity fee and redemption gate provisions from Rule 2a-7; impose a new swing pricing regime for non-government institutional money funds (i.e., institutional prime and institutional tax-exempt money funds); require money funds to calculate their weighted average maturity (WAM) and weighted average life (WAL) using the market values of their portfolio securities; and amend certain reporting requirements in Forms N-MFP and N-CR. The Proposed Amendments also would set forth the SEC’s view that it would be inappropriate for a stable net asset value (NAV) money fund with a gross negative yield to continue to seek to maintain a stable NAV.

The Proposed Amendments represent the most significant effort by the SEC to reform the money fund industry since the series of reforms it adopted following the 2007-2008 financial crisis. Similar to those reforms, the Proposed Amendments attempt to respond to significant market events and the SEC’s understanding of the roles and vulnerabilities of money funds during such events. Specifically, the SEC stated in the proposing release (Release) that the Proposed Amendments are “designed to improve the resiliency and transparency of money market funds” in response to the stresses experienced in March 2020, when the onset of the COVID-19 coronavirus pandemic led to substantial redemptions primarily from non-government institutional money funds, as well as the associated stresses experienced in the asset classes in which such funds invest (i.e., in the short-term credit markets). The Release describes how these stresses ultimately led to intervention by the Federal Reserve in support of money funds and the proper functioning of the short-term credit markets. In addition, the Release notes that the Proposed Amendments are based in part on the SEC’s consideration of public comments it received in connection with the report issued by the President’s Working Group on Financial Markets in December 2020 (PWG Report), which discussed the events of March 2020 and potential money fund reform options. The Proposed Amendments could have a significant impact on money funds and the markets in which they invest. The Proposed Amendments also raise potential issues for money fund boards of directors, service providers, intermediaries and investors. Moreover, the new swing pricing regime for non-government institutional money funds might fundamentally impact whether such funds can continue to be utilized by certain investors for cash management purposes. This Dechert OnPoint provides an overview the Proposed Amendments and their applicability to categories of money funds, and then discusses each of the Proposed Amendments in more detail.

Read the full OnPoint here.