On July 12, 2023, the Securities and Exchange Commission (the “SEC”) voted 3 to 2 (Commissioners Peirce and Uyeda dissenting) to adopt certain amendments to rules and forms under the Investment Company Act of 1940 (the “Investment Company Act”) intended to improve the resilience and transparency of money market funds (“MMFs”). The SEC’s actions are a response to the outflows experienced by certain types of MMFs in March 2020 during the economic shock related to the COVID-19 pandemic which resulted in intervention by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
As proposed, the SEC amended rule 2a-7 under the Investment Company Act to remove the temporary redemption gate provisions and the tie between liquidity fees and weekly liquid asset thresholds. Also as proposed, the SEC increased the minimum liquidity requirements applicable to MMFs to 25% daily liquid assets (up from 10% under the current rule) and 50% weekly liquid assets (up from 30% under the current rule). In response to comments from industry and market participants on the significant operational complexity and lack of feasibility of the proposed swing pricing requirement for institutional prime and institutional tax-exempt MMFs, the SEC instead adopted a mandatory liquidity fee for these MMFs in an attempt to “better allocate liquidity costs associated with redemptions to the redeeming investors.” The SEC did not include the mandatory liquidity fee in its proposal and, without re-proposing this aspect of the rule before adopting it, has not provided commenters (including the MMF industry) with a meaningful opportunity to provide input on whether the mandatory liquidity fee raises many of the same potential negative consequences for MMFs and their shareholders as the proposed swing pricing framework.