Money Market Funds

October 23, 2015

Money market funds are subject to comprehensive regulation under the federal securities laws, primarily Rule 2a-7 under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Securities and Exchange Commission (SEC) has, over a period of more than thirty-five years, developed and refined a complex regula­tory scheme designed to limit a money market fund’s underlying portfolio risk and impose strict operational and procedural require­ments. Money market funds are also subject to specific disclosure, advertising and reporting rules that differ from those that apply to other registered investment companies.

Events during the 2008 financial crisis called into question whether money market funds should continue to be allowed to sell and redeem their shares at a stable $1 share price. In response to these events, the SEC adopted two rounds of sweeping amendments to Rule 2a-7 and the other rules that govern money market funds. These amendments—adopted in February 2010 (the “2010 Amendments”) and July 2014 (the “2014 Amendments”)—were generally intended to: (i) enhance the ability of money market funds to maintain a $1 share price in the face of severe market events, such as the market illiquidity in the fall of 2008 that threatened the ability of many money market funds to meet redemptions, and (ii) limit the systemic risk that money market funds are alleged to pose to the financial system because of certain features that may incentivize investors to redeem their shares during periods of market stress.

Most recently, in September 2015, the SEC adopted additional amendments to Rule 2a-7. These amendments, which removed ref­erences to credit ratings by nationally recognized statistical rating organizations (NRSROs), implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 939A of the Dodd-Frank Act required federal agencies, including the SEC, to review any regulation that requires an assessment of the credit worthiness of a security or money market instrument and any references to or requirements in such regulations regarding credit ratings. This section required the replace­ment of any references to credit ratings with other appropriate stand­ards of creditworthiness in such regulations.

This chapter describes the laws and regulations governing money market funds in the wake of the 2010, 2014, and 2015 Amendments. However, it should be noted that, as of the date of this publication, money market funds are not yet required to comply with certain provisions of the 2014 and 2015 Amendments, including the require­ments that: (i) institutional non-government money market funds sell and redeem their shares at a floating net asset value (NAV); and (ii) money market funds review the credit worthiness of securities without regard to credit ratings. The compliance dates for various provisions of the 2014 and 2015 Amendments range from April 14, 2016 to October 14, 2016. We have referenced these compliance dates in the discussion of those provisions below.

For more information, please visit the Practising Law Institute's website.

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