SEC Proposed Rule: Money Market Fund Reform
|FINAL RULE: This page refers to the proposed rulemaking on Money Market Fund Reform. For a summary of the final rule, click here.|
|First Proposal (failed to pass)||New Proposed Rule||Final Rule Approved|
|August 2012||June 19, 2013||July 23, 2014|
On June 5, 2013, the SEC unanimously approved a proposed rule that would reform U.S. money market mutual funds. The goal of the legislation is to make such investment vehicles less susceptible to rapid, large-scale withdrawals ("runs"). <ref>SEC Proposes Money Market Fund Reforms. Securities and Exchange Commission News Digest. Retrieved on June 7, 2013.</ref>
The rule appeared in the Federal Register on June 19, 2013. The deadline for public comment was September 17, 2013. Comments may be viewed HERE. Specifically, the commission sought input from the public on two options for structural reform, of which one or both could be implemented:
- a floating net asset value (NAV) for prime institutional money market funds, and
- using liquidity fees and/or redemption gates during times of market stress.
The proposal also included additional diversification and disclosure requirements.
At the height the financial crisis of 2008, a large money market fund, the Reserve Primary fund, "broke the buck," meaning the value of its investment income failed to cover expenses, usually due to a loss or default on investments in the fund's portfolio. In the case of Reserve Primary, the fund's exposure to securities held by Lehman Brothers, the investment bank that filed for bankruptcy in September 2008, caused the fund's NAV to fall to 94 cents (generally, money market funds hold the NAV constant at $1.00).
Since money market funds were large purchasers of the commercial paper corporate America uses to finance its operations, that market ground to a halt as well, creating serious problems for the real economy. <ref>Money Market Fund Overhaul Is Early Test for Dodd-Frank. New York Times Dealbook. Retrieved on June 7, 2013.</ref>
Money market reform efforts by former SEC Chair Mary Schapiro stalled in August 2012 after heavy lobbying by the industry. Three of the SEC’s five commissioners had indicated that they would oppose the proposed rules.<ref>Money Fund Reform Has Top Support. New York Times. Retrieved on June 7, 2013.</ref> Schapiro announced her resignation three months later.
In November 2012, at the request of the SEC, the Financial Stability Oversight Council issued its recommendations for money market reform, with the idea that, if the SEC could not muster sufficient support, the FSOC could step in. Additionally, SEC Staff released a study in December 2012 that analyzed money market fund redemptions during the 2008 crisis. The study indicated that government money market funds were less likely to see a run during periods of market stress.
After months of negotiation, the SEC issued its revised proposal, which passed unanimously. After the comment period, the commission will move to finalize the rules.
Key Provisions of the Proposed Rule
The proposed rule offers two options for reform that can be enacted either together or separately.
- Floating NAV: Under this proposal, prime institutional money market funds would be required to transact at a floating net asset value (NAV), rather than a $1.00 stable share price. The idea is to reduce the incentive to redeem shares in times of financial stress, and also to improve the price transparency and valuation of such funds. Daily share prices would fluctuate, along with any changes in the market value of the portfolio. Additionally, the "penny-rounding" of share price, as in the current model, would change to a "basis-point rounding" method. Government and retail money market funds would be allowed to continue using the penny rounding method of pricing and maintain a stable share price.
- Liquidity Fees and Redemption Gates: Under this proposal, money market funds would continue to transact at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress.
- Liquidity Fees — If a money market fund’s level of "weekly liquid assets", i.e., cash, U.S. Treasury securities and certain short-term government securities, were to fall below 15 percent of its total assets (half the required amount), the money market fund would have to impose a 2 percent liquidity fee on all redemptions, unless the fund’s board of directors determines that such a fee is not in the best interest of the fund or that a lesser liquidity fee is in the best interest of the fund.
- Redemption Gates — Once a money market fund had crossed this threshold, its board of directors also would be able to impose a temporary (less than 30 days) suspension of redemptions (or “gate”). A money market fund that imposes a gate would need to lift that gate within 30 days, although the board of directors could determine to lift the gate earlier.
- Money market funds would be required to promptly and publicly disclose the fund crossing of the 15 percent weekly liquid asset threshold, the imposition and removal of any liquidity fee or gate, and a discussion of the board’s analysis in determining whether or not to impose a fee or gate.
Government money market funds would be exempt from the fees and gates requirement. However, these funds could voluntarily opt into this new requirement.
Related Documents: Federal Register Entry