Money Market Mutual Funds: Securities and Exchange Commission Voted Unanimously to Propose Money Market Funds Reforms

Sullivan & Cromwell LLP - June 7, 2013

On June 5, 2013, the SEC voted unanimously to propose alternatives for amending rules that govern money market mutual funds under the Investment Company Act of 1940. Two alternative reforms to rule 2a-7 under the Investment Company Act of 1940 could be adopted separately or combined into a single reform package: 

  • Alternative One: Floating Net Asset Value (“NAV”): The proposal would require all institutional prime money market funds to sell and redeem shares based on the current market value of the fund’s portfolio securities, rounded to the fourth decimal place, rather than at a $1.00 stable share price. Retail and government money market funds would be exempt from the floating net asset value requirement and would be allowed to continue using the penny-rounding method of pricing to maintain a stable share price but would not be allowed to use the amortized cost method to value securities.
  • Alternative Two: Liquidity Fees and Redemption Gates: Money market funds, other than government money market funds, would be required to impose a 2% liquidity fee if the fund’s level of weekly liquid assets fell below 15% of its total assets, unless the fund’s board of directors (a “Board”) determined that it was not in the best interest of the fund or that a lesser liquidity fee was in the best interests of the fund. After a fund has fallen below the 15% weekly liquid assets threshold, the Board would also be able to temporarily suspend redemptions in the fund for no more than 30 days in any 90-day period.

Additionally, the proposal contains a number of other reforms related to diversification of portfolio assets, enhanced stress testing and expanded disclosure and reporting requirements that would apply under either alternative. The proposal is subject to a 90-day comment period following publication in the Federal Register.