SEC approves amendments to its money-market fund rules

The Securities and Exchange Commission on Wednesday approved amendments to its money market fund rules, increasing liquidity requirements, and allowing money market funds to suspend redemptions temporarily in efforts to limit runs on money market funds such as  those experienced in 2008 and 2020.

The amendments will affect tax-exempt money market funds and the most controversial provision, the one the money market fund industry largely opposed, is the imposing of liquidity fees for net redemptions that exceed 5%.

“To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund’s liquidity costs are de minimis,” the SEC said.

Healthy money market funds are important to the municipal market. Money market funds are purchasers of municipal securities, and municipal issuers utilize the funds as investors.

The effect of the amendments on the municipal market will be limited, said Michael Decker, senior vice president for research and public policy at the Bond Dealers of America, and its effects will be limited to the funds themselves. BDA did not submit a comment letter on the proposal, but others say the amendments could have unintended consequences.

“While we support the goals of enhancing resilience of money market funds, we remain concerned that imposing additional fees and operational costs on shareholders could adversely impact money market funds,” said Kenneth Bentsen, president and chief executive officer of the Securities Industry and Financial Markets Association. “We encourage the SEC to closely monitor the implementation of these new rule amendments and stand ready to assist funds as questions and challenges arise, particularly in light of a compliance date only a year in the future that comes amidst other crucial operational priorities such as the move to T+1. We also trust that the SEC will monitor the impact of these amendments and make future refinements as warranted to ensure that money market funds can continue to play their important role in financial markets.”

This marks the third time since the Global Financial Crisis that rules governing money-market funds have been amended, but the first time since the runs experienced in 2020.

“The reforms being adopted today follow a series of reforms the Commission undertook in 2010 and in 2014,” said SEC commissioner Jaime Lizarraga. “These prior reforms provided for enhanced liquidity risk management, the ability to suspend redemptions, stress testing, and improved disclosures. But the experience of March 2020 revealed that these reforms did not mitigate runs in this market, nor did they reduce the likelihood of massive taxpayer bailouts.

The amendments also include provisions that allow retail and government money market funds to handle a negative interest rate environment by converting a stable share price to a floating share price by reducing the number of shares.

They also require any non-governmental money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund, in moves designed to protect remaining shareholders “from dilution and to more fairly 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 Commission said.

The original proposal also included a requirement that institutional prime and institutional tax-exempt money market funds adopt swing pricing measures in order for investors to bear the costs of their redemptions but that was not included in the final amendments. Swing pricing is when a fund “artificially changes the net asset value of the fund on any given day that flows in or out of a fund are deemed to be too great,” the Investment Company Institute explained in an alert on the subject.

“SIFMA is pleased that the SEC opted against imposing swing pricing on money market funds,” Bentsen said. “While we remain skeptical that anti-dilution measures are necessary, the path of liquidity fees for institutional money market funds is a more feasible alternative,” Bentsen said. “Additionally, SIFMA is pleased that the Commission removed fees and gates from Rule 2a-7. SIFMA supports increased daily and weekly minimums. Together, these measures are sufficient to enhance money market fund resiliency in light of March 2020 events.”

“Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors,” said SEC chair Gary Gensler.