At an open meeting on Dec. 15, 2021, the U.S. Securities and Exchange Commission (SEC), in a 3-2 vote, proposed amendments to Rule 2a-7 under the Investment Company Act of 1940 (1940 Act) that, if adopted, will impact the manner in which all money market funds operate. The key provisions of the proposed amendments would:
- Completely eliminate liquidity fee and redemption gate provisions in Rule 2a-7 for all money market funds
- Require swing pricing for institutional prime and institutional tax-exempt money market funds
- Increase daily and weekly liquid asset requirements to 25% and 50%, respectively (from 10% and 30%, respectively)
- Require board notification and filing on Form N-CR if a fund has less than 25% of total assets invested in weekly liquid assets or 12.5% of total assets invested in daily liquid assets
- Prohibit certain mechanisms for maintaining a stable net asset value (NAV) per share in negative interest rate environments, such as by reducing the number of fund shares outstanding (including through reverse distribution mechanisms)
Additionally, the SEC has proposed amendments to reporting requirements on Forms N-MFP and N-CR that, if adopted, will require increased SEC reporting to improve the availability of information about all money market funds.
This alert summarizes the major features of the proposal. We will issue a series of alerts in the coming weeks to discuss in detail key aspects of the rulemaking package. In each alert, we will provide a deeper analysis of the proposed rule’s potential impact on current fund operations and fund board oversight. In addition, Stradley will host a webinar on Jan. 13, 2022 at 2:00 pm (Eastern time) on the proposal. Details will follow soon.
Please let our money market fund team know if you have any questions about the proposal or this alert.
Background: March 2020 and Money Market Funds
In March 2020, concerns and uncertainty regarding the COVID-19 pandemic caused significant market volatility and stress on the short-term funding markets, which affected various money market funds. Government money market funds experienced large inflows as investors, particularly institutional investors, sought to reallocate assets into cash and other more liquid investment types; whereas other types of money market funds, particularly institutional prime money market funds, experienced varying levels of outflows in periods of market turmoil.
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