On July 12, 2023, the Securities and Exchange Commission (SEC) adopted amendments to certain rules governing money market funds in order to improve funds’ resilience and transparency, given certain funds’ vulnerability to runs in times of stress.
The amendments, as summarized by the SEC, effectively:
- Increase minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions
- Remove provisions from the current rule that permit a money market fund to temporarily suspend redemptions, and remove the regulatory tie between the imposition of liquidity fees and a fund’s liquidity level
- Require certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors
- Enhance certain reporting requirements to improve the SEC’s ability to monitor and assess money market fund data
Regarding the reporting requirements, the SEC is amending certain requirements on Form N-MFP and Form N-CR and making certain conforming changes to Form N-1A to reflect amendments to the regulatory framework for money market funds.
In addition, the SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to require additional information regarding the liquidity funds they advise that is generally aligned with the amended reporting for money market funds.
Liquidity fee framework and financial reporting considerations for investors
Notably, the SEC amended a liquidity fee framework to protect remaining shareholders from dilution when certain money market funds experience daily net redemptions that exceed 5% of net assets. The framework, which was amended in lieu of adopting a proposed swing pricing requirement, is also designed to allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.
The SEC’s final rule addressed U.S. GAAP considerations in the context of commenters’ discussion about the potential accounting implications of swing pricing.
“Under normal market conditions, we generally would not expect the amount of a liquidity fee a fund charges to prevent a shareholder from continuing to classify the fund’s shares as ‘cash equivalent’ under U.S. GAAP,” the SEC wrote.
“However, as is the case today, if events that give rise to credit or liquidity issues for funds occur, shareholders would need to reassess if their investments in that money market fund would continue to meet the definition of a cash equivalent. If events occur that cause shareholders that are corporate entities to determine that their money market fund shares are not cash equivalents, the shares would need to be classified as investments, and shareholders would have to account for them accordingly.”
Other amendments
The amendments will increase the minimum liquidity requirements for money market funds to at least 25% of a fund’s total assets in daily liquid assets and at least 50% of a fund’s total assets in weekly liquid assets. The SEC designed these requirements to better equip money market funds to manage significant and rapid investor redemptions in stressed market conditions while maintaining funds’ flexibility to invest in diverse assets during normal market conditions.
The amendments also will remove money market funds’ ability to impose temporary gates to suspend redemptions, as well as remove the regulatory tie that permits money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are meant to reduce the risk of investor runs on money market funds during periods of market stress. The rule amendments will become effective 60 days after publication in the Federal Register. The reporting form amendments will become effective June 11, 2024. The SEC is adopting a tiered approach to the transition periods for the other final amendments. The SEC has provided for a six-month transition period for funds to comply with certain amendments, including the minimum portfolio liquidity requirements and the discretionary liquidity fee provision. Funds will have 12 months after the effective date to comply with the amended rule’s mandatory liquidity fee provision.
