Money Market Funds: Securities and Exchange Commission Adopts Money Market Fund Rule Amendments Requiring Institutional Funds to Adopt Floating Net Asset Values and Permitting Boards to Impose Liquidity Fees and Suspend Redemptions

Sullivan & Cromwell LLP - July 28, 2014

On July 23, 2014, the Securities and Exchange Commission voted 3-2 to adopt amendments to the rules that govern money market funds under the Investment Company Act of 1940.  The amendments include the following:

  • Floating Net Asset Value Requirement: Institutional, non-government money market funds will no longer be permitted to maintain a stable net asset value per share, and instead must sell and redeem shares based on the current market value of the securities in their underlying portfolios, rounded to the nearest 1/100th of one percent (e.g., $1.0000).  Government and retail money market funds would be permitted to continue to maintain a stable net asset value.
  • Liquidity Fees and Redemption “Gates”:  A money market fund board of directors or trustees may, if the fund’s weekly liquidity level falls below 30% of its total assets, (A) impose a liquidity fee of up to 2% on redemptions and/or (B) temporarily suspend redemptions, in each case if the board determines such action is in the best interests of the fund.  In addition, money market funds will be required to impose a liquidity fee of 1% if the fund’s weekly liquidity level falls below 10% of its total assets, unless the board determines that such fee is not in the best interests of the fund or that a different fee (not to exceed 2%) is in its best interests.
  • Other Money Market Fund Reforms:  The rule amendments contain several other reforms that will require increased diversification of money market fund portfolios, enhanced stress testing requirements, and enhanced reporting to the Commission and the public.  Enhanced reporting will also apply to unregistered investment advisers of certain large liquidity funds.

Treasury Secretary Lew released statements following the vote describing the rules as “important structural reforms,” characterizing the SEC’s action as a “significant step forward,” and praising the Financial Stability Oversight Council’s role in encouraging the Commission to act.  The Financial Stability Oversight Council subsequently announced that it will meet in closed session on July 31, 2014, to discuss, among other topics, money market fund reform.
The final rules become effective 60 days after their publication in the Federal Register, and funds will have two years from publication to comply with the floating net asset value requirement and the rules relating to liquidity fees and redemption gates.  Funds will have either nine or 18 months to comply with the other reforms in the final rules.

Also on July 23, the Commission voted unanimously to (1) propose an order that would exempt, subject to certain conditions, money market funds that maintain a floating net asset value from the immediate confirmation delivery requirements of rule 10b-10 of the Securities Exchange Act of 1934 and (2) re-propose amendments to remove references to credit ratings in the money market fund rules and to amend diversification rules to eliminate an existing exclusion for securities subject to a guarantee issued by a non-controlled person.  The proposed order for exemptive relief will be subject to a 21-day public comment period after its publication in the Federal Register.  A 60-day public comment period will apply to the proposed credit rating-related amendments.